In the Aftermath of a Venture Capitalist – An Examination of Market Reactions Caused by Venture Capitalists´ Disposals

Abstract

Insider trading creates price fluctuations because of insider´s access to better information. Venture capitalist has great insight in the firm due to its large stake and long historical ownership of the firm. This study examines the market reaction when venture capital funds decreases their positions in venture-backed companies by selling off shares and distribute cash to its owners. The exit is exercised after the lock-up period post an IPO. The venture-backed company´s stock performance should respond to the Venture capitalist´s investment decisions which will be examined conducting an event study. Our results indicate a negative initial relationship between Venture capitalists´ sell transactions and stock price performance of the venture-backed firms. The short-term stock price performance post the Venture capitalist´s disposal is significantly positive.