Do venture capitalists improve the operating performance of IPOs?

This paper uses rigorous measures of operating performance and a sample extending into the post 2000 period to reexamine the performance of venture capital (VC) backed initial public offerings (IPOs). We find that the VC backed IPOs underperform non-VC backed IPOs, especially when firms have high ex...

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Bibliographic Details
Published in:International review of economics & finance 2016-07, Vol.44, p.291-304
Main Authors: Chen, Hung-Kun, Liang, Woan-lih
Format: Article
Language:English
Subjects:
Cash
Initial public offering
Initial public offerings
Operating performance
Studies
Venture capital
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Summary:This paper uses rigorous measures of operating performance and a sample extending into the post 2000 period to reexamine the performance of venture capital (VC) backed initial public offerings (IPOs). We find that the VC backed IPOs underperform non-VC backed IPOs, especially when firms have high excess cash, and propose that the higher excess cash retained in VC backed firms at IPO date may result in wasteful investment. Post-IPO real investment also confirms this notion. Further, our result holds whether or not VCs are on the board after the IPO date. Overall, our study supports the overinvestment hypothesis. •Venture capital (VC) backed IPOs underperform non-VC backed IPOs, especially when firms have high excess cash.•Higher excess cash retained in VC backed firms at IPO date may motivate them to engage in wasteful investment.•Post-IPO real investment also supports the overinvestment hypothesis
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2015.12.009