The role of venture capitalist monitoring in mitigating cost stickiness: Evidence from Korea's IPO market

•High susceptibility of IPO issuers to cost stickiness under the pretext of the expansion.•The active monitoring of long-term venture capitalists as effective corporate governance.•IPO issuers’ preferences for excessive resources to pursue the empire-building strategies.•Managerial optimism to be ov...

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Bibliographic Details
Published in:Finance research letters 2023-03, Vol.52, p.103560, Article 103560
Main Authors: Yang, Daecheon, Koo, Jeong-Ho, Kim, Jaemin
Format: Article
Language:English
Subjects:
Cost stickiness
Empire-building preferences
Initial public offering
Managerial optimism
Venture capitalist
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Summary:•High susceptibility of IPO issuers to cost stickiness under the pretext of the expansion.•The active monitoring of long-term venture capitalists as effective corporate governance.•IPO issuers’ preferences for excessive resources to pursue the empire-building strategies.•Managerial optimism to be overwhelmed by the atmosphere of rapid growth around IPOs. This study investigates the monitoring role of venture capitalists in mitigating the degree of cost stickiness, which may stem from optimistic issuers intoxicated by the prosperous environment surrounding IPOs. In Korea's KOSDAQ market, we find that an issuing company managed by optimistic issuers is affected by cost stickiness after the offering. However, this cost stickiness decreases with the presence and the percentage ownership of long-term VCs. Our findings imply the role of VC monitoring in restraining issuers’ suboptimal decisions in an emerging IPO market.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2022.103560