IPO underpricing not only is one of the major financial disorders（contrary to the effective market theory）, but also has become a hot issue in the field of asset pricing and corporate finance. In addition to the IPO underpricing of ordinary enterprises, IPO underpricing for VC-backed companies is even more attractive to the academia. How do venture capital institutions（VCs） affect the efficiency of IPO pricing? In particular, the topic concerning whether the " good venture capital” is more able to effectively play its monitoring and value-added functions and helps to reduce IPO underpricing, has become an unavoidable issue for empirical research and inquiry. First of all, considering the venture capitalist’s investment practice around the " value discovery-value creation-value realization” of " investment, monitoring and exit” trilogy cycle, this paper deviates from the existing literature widely concerned with VCs’ screening and monitoring effects, and takes the screening and selection effects of " investment”stage, the monitoring and value-added effects of " monitoring” stage and the market power effect of " exit” stage as the sources of the mechanism, to empirically test the impact of venture capital firms on the companies’IPO underpricing. Then, this paper uses VC-backed companies in Shanghai and Shenzhen A-share IPO data sample, and finds that: （1）VCs play a monitoring and value-added role in the companies’ IPO underpricing, which helps to reduce information asymmetry in the primary market. （2） The screening and selection effects of VCs represent an important signal of the potential and prospects for the VC-backed companies. It promotes and exacerbates the irrational behavior of investors in the stock markets, and helps to raise the IPO underpricing of the invested companies.（3）The market power effect of VCs doesn’t significantly affect IPO underpricing. Finally, this paper estimates the overall effect of the three stages of " investment, monitoring and exit” on the companies’IPO underpricing. The results show that in terms of economic significance, the monitoring and value-added effects of VCs play a dominant role. Meanwhile the other two effects are almost negligible, and this means that " good VCs” can indeed reduce the IPO underpricing rate more effectively. This paper helps to deepen and expand the research on the impact mechanism of VCs, to understand VCs’monitoring and value-added functions, and to provide new ideas for the study of IPO underpricing.
Can Good Venture Capitalists Decrease IPO Underpricing? A Study Based on the Trilogy of Investment, Monitoring and Exit for VCs
Journal of Shanghai University of Finance and Economics Vol. 20, Issue 02, pp. 73 - 88 (2018) DOI:10.16538/j.cnki.jsufe.2018.02.005
Cite this article
Fu Hui. Can Good Venture Capitalists Decrease IPO Underpricing? A Study Based on the Trilogy of Investment, Monitoring and Exit for VCs[J]. Journal of Shanghai University of Finance and Economics, 2018, 20(2): 73-88.