Venture Capital-backing pre-IPO and Long-run Stock Performance

Abstract

This study aims to examine the effects that venture capital-backing has on companies that recently went public. The study examines three specific parts; a general stock return increasing signal of venture capital-backing, whether company characteristics affect the relationship between venture capital-backing and stock returns, and venture capital-backing in two specific industries. Multiple linear regression models are constructed with accounting data from the year of the initial public offering and venture capital-backing as explanatory factors, and market-adjusted stock returns as the performance measure. A general signaling effect of venture capital-backing is not found, however, undervaluation and overvaluation of company-level characteristics affected by venture capital-backing are found in the two industries. Furthermore, company-level characteristics are found to have effects on the relationship between venture capital-backing and stock return. The effect of venture capital-backing is larger when proxies for information asymmetry are larger, indicating that signaling theory fits well to explain the findings.