venture capitalist certification in initial public offerings.docx
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1、THE JOURNAL OF FINANCE VOL. XLVI, NO. 3 JULY 1991 Venture Capitalist Certification in Initial Public Offerings WILLIAM L. MEGGINSON and KATHLEEN A. WEISS* ABSTRACT This paper provides support for the certification role of venture capitalists in initial public offerings. Consistent with the certifica
2、tion hypothesis, a comparison of venture capital backed IPOs with a control sample of nonventure capital backed IPOs from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spr
3、eads. In effect, the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm. In addition, we document that venture capitalists retain a significant portion of their holdings in the firm after the IPO.
4、 THE ABILITY OF THIRD-PARTY specialists to certify the value of securities issued by relatively unknown firms in capital markets that are characterized by asymmetric information between corporate insiders and public investors has attracted much academic interest in recent years. Several authors, inc
5、luding James (1990), Blackwell, Marr, and Spivey (1990), and Barry, Muscarella, Peavy, and Vetsuypens (1991) have developed and tested models based at least in part on the formal certification hypothesis presented in Booth and Smith (1986). A related body of work, represented by DeAngelo (1981), Bea
6、tty and Ritter (1986), Titman and Trueman (1986), Johnson and Miller (1988), Carter (1990), Simon (1990), and Carter and Manaster (1990) has examined how investment bankers and auditors help resolve the asymmetric information inherent in the initial public offering (IPO) process. In this paper we ex
7、amine whether the presence of venture capitalists, as investors in a firm going public, can certify that the offering price of the issue reflects all available and relevant inside information. We hypothesize that venture capitalists can perforin this function; that it will be an economically *The Un
8、iversity of Greorgia, Department of Banking and Finance, School of Business Administration, Athens; and The University of Michigan, School of Business Administration, Ann Arbor; respectively. We are grateful to Mike Barclay, David Blackwell, Michael Bradley, Susan Chaplinsky, Harry DeAngelo, Cliff H
9、olderness (discussant), E. Han Kim, Laura Kodres, Ron Masulis, Jeff Netter, Annette Poulsen, Bill Sahlman, H. Nejat Seyhun, Dennis Sheehan, and seminar participants at Harvard University, the University of Oregon, and Purdue University for their comments and recommendations. We also acknowledge the
10、data collection assistance provided by Rick Mull, Eric Van Houwelingen, and So Han Lee. Financial support for this project was provided by the Center for Entrepreneurial Studies at New York University, the University of Michigan Summer Research Program, and the University of Greorgia Research Founda
11、tion. 879 880 The Journal of Finance valuable function; and that the certification provided by venture capitalists will be both a partial subsititute for and a complement to the certification provided by prestigious auditors and investment bankers. We employ a matched pairs methodology where a sampl
12、e of venture capital (VC) backed IPOs is matched by industry and offering size with a qualitatively equivalent set of non-VC backed IPOs, to focus as clearly as possible on the question of whether venture capital certification occurs and is valuable. Our results strongly indicate that the presence o
13、f venture capitalists in offering firms maximizes the fraction of the proceeds of the IPO, net of underpricing and direct costs, which accrues to the issuing firm. Specifically, we document that VC backing reduces the mean and median degree of IPO underpricing and that such backing significantly red
14、uces the underwriting spread charged by the investment banker handling the issue. Further support for the venture capitalist certification hypothesis is provided by our finding that VC backed issuers are able to attract more prestigious auditors and underwriters than non-VC backed issuers. In additi
15、on, VC backed issuers also elicit greater interest from institutional investors during the IPO and are able to go public at a younger age than other firms. Finally, the credibility of venture capitalists information is enhanced by the fact that they are major shareholders prior to the IPO and retain
16、 significant portions of their holdings after the offer. This study is organized as follows. In Section I, a general model of venture capital certification is provided. The sample selection criteria and descriptive statistics are presented in Section II. In Section III, the comparison of underwriter
17、 and auditor quality and the level of institutional shareholdings between VC and non-VC backed firms is examined. Empirical tests of the certification hypothesis are presented in Section IV. The pre- and post-IPO ownership structure of venture capitalists in the issuing firm is documented in Section
18、 V. Section VI concludes the study. I. Certification by Venture Capitalists Third party certification has value whenever securities are being issued in capital markets where insiders of the issuing firm and outside investors have different information sets concerning the value of the offering firm.
19、Corporate insiders have an incentive to conceal (or at least delay the revelation of) adverse information because doing so will allow them to sell securities at a higher price. Rational outside investors understand these incentives and will only offer a low average price for the securities offered u
20、nless they can be credibly assured that the offering price already reflects all relevant private information. This informationally induced standoff can lead to market failure of the type described by Akerlof (1970) unless the information asymmetry can be reduced. Although Allen and Faulhaber (1989),
21、 Grinblatt and Huang (1989), and Welch (1989), have presented signalling models which predict that corporate insiders can unilaterally convey their private information, there are several Venture Capitalist Certification in Initial Public Offerings 881 factors which make first-party statements and ac
22、tions suspect. For one thing, Gale and Stiglitz (1989) show that IPO signalling models break down when insiders are allowed to sell equity more than once. More fundamentally, insiders have everything to gain and very little to lose from signalling falsely at the time of an IPO. They sell securities
23、only infrequently and thus would only be “punished” far in the future if at all. Their gain, however, would be immediate and possibly quite large. While disclosure regulation will surely discourage flagrant lying and material omissions see Tinic (1988), it is unlikely to be completely effective in f
24、orcing disclosure of all relevant information. Therefore, in the absence of effective signalling mechanisms in IPOs, outside investors are likely to be convinced that accurate information disclosure has occurred only if a third party, with reputational capital at stake, has asserted such and will be
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