Informational externalities of initial public offerings: Does venture capital backing matter?

We examine the role of venture capital backing on informational externalities generated by IPO firms. Theoretical models predict that going public firms generate positive externalities creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey p...

Full description

Saved in:
Bibliographic Details
Published in:Journal of economics and finance 2013, Vol.37 (1), p.80-99
Main Authors: Cotei, Carmen, Farhat, Joseph
Format: Article
Language:English
Subjects:
Abnormal returns
Competition
Economics
Economics and Finance
Equity
Finance
Going public
Hypotheses
Information management
Initial public offerings
Investments
Macroeconomics/Monetary Economics//Financial Economics
Prices
Revisions
Studies
Valuation
Venture capital
Venture capital companies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We examine the role of venture capital backing on informational externalities generated by IPO firms. Theoretical models predict that going public firms generate positive externalities creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive information about industry and this information is transferred to rival firms. We also hypothesize that intra-industry information transfer varies with rivals’ characteristics and IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We find evidence that the effect on rival firms is stronger if they operate in less concentrated industries and have high growth opportunities. The larger the IPO proceeds, the higher the magnitude of rivals ‘valuation effects. Positive (negative) information revealed in the form of upward (downward) price revisions significantly impacts rivals’ reaction in response to venture backed IPOs.
ISSN:1055-0925
1938-9744
DOI:10.1007/s12197-010-9167-2