University of Nebraska-Lincoln College of Business Administration

The Certification Role of Large Block Shareholders in Initial Public Offerings: The Case of Venture Capitalists Author(s): Timothy H. Lin Reviewed work(s): Source: Quarterly Journal of Business and Economics, Vol. 35, No. 2 (Spring, 1996), pp. 55-65 Published by: University of Nebraska-Lincoln College of Business Administration Stable URL: http://www.jstor.org/stable/40473183 . Accessed: 06/03/2012 04:06
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The Certification Role of Large Block Shareholders in Initial Public Offerings: The Case of Venture Capitalists
Timothy H. Lin NationalChungChengUniversity
This paper provides evidencefor the certification role of large block shareholders in the initialpublic offering process. I use an exhaustiveset of venture initial as an example.Thepresenceof venture capital capital-backed public offerings costs. In and underwriting firmsin an issuing firmservesto reducetheunderpricing is associated negatively with addition,lead venture capitalistpre-IPO shareholding initialreturn. Consistent withthe certification the qualityof theirrepuhypothesis, tationis recognized lowerunderpricing and underwritby thecapitalmarket through ing spread.

Thereis considerable andevidence that initial (IPOs), on avertheory publicofferings initial and that to seasoned returns themarket reacts positive negatively age, experience Thiskindof market of Leland and Pyle reaction is a direct equityofferings. implication Welch (1989), Allen and Faulhaber (1977) and Myersand Majluf (1984). Although andHwang(1989) havepresented modelsthat that (1989), andGrinblatt predict signaling value firms IPO undercan their information intrinsically higher through convey private to deter makethe there are severalreasonsthat pricing mimicking by lowervaluefirms, first actions For and show that initial Gale (1989) public party suspect. example, Stiglitz morethan modelsbreakdownwhenissuers are allowedto sell equity offering signaling once. If potential investors cannot of new equity offerings distinguish amongthequality andplace an average valueon all issues,thelemons described (1970) problem byAkerlof occurs. an effective can hire To provide mechanism for an equity an issuer offering, signaling model the or lease thereputation from a third Booth and Smith (1986) party specialist. in new certification roleprovided investment bankers to reduce information by asymmetry and Trueman (1986), Johnson (1989), Titman equity offerings. DeAngelo(1981), Beatty andMiller(1988),andCarter andManaster how auditors and underwriters examine (1990) in the resolve the information inherent IPO help asymmetric process.Megginsonand that theinitial toventure-capital Weiss (1991) find return (VC)-backedIPOs is lowerthan IPOs. Theirevidencesuggests thatthepresenceof largeblock thatof non-VC-backed in reducing IPO uncershareholders a complement tounderwriter mayprovide reputation In show that venture and Muscarella, addition, (1990) tainty. Barry, Peavy, Vetsuypens in service. intense their investments firms to monitoring capitalists specialize provide lower underpricing. Theirmonitoring functions are recognized through by themarket that themonitoring function Moreover, (1995a) finds capibyventure Gompers provided I this and entrepreneurial talistsis valuable bothto investors companies. distinguish the the on VC from earlier works Using equallyweighted by focusing reputation. study
55 0747-5535/96/1300-0055 $02.50 of Nebraska-Lincoln University

INTRODUCTION

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I find valueofstandardized for that IPO underventure size andage as a proxy reputation, is consistent costs are associated with VC The evidence writing negatively reputation. with Boothand Smith's(1986) certification hypothesis. in their Venture are activeinvestors that are insiders companies. capitalists portfolio and serve hold substantial functions, Usuallythey equity positions, perform monitoring on company the boardsofdirectors. The successofa VC firm not on ability depends only butalso to identify and nurture itsportfolio that are likelyto be successful, companies to unwind itsequity so that returns from dependson theability entrepreneurial position effort are maximized. Whena portfolio VC firms usuallyplayan company goes public, Venture rolein helping thecompany choosemanaging underwriters.1 capitalimportant in meetings istsmayparticipate of underwriters anddiscussthetimwith representatives of theoffering. Withequity at stake, have an incentive venture ingand terms capitalists to taketheir portfolio companies publicwhentheportfolio companies'equityvaluations arehigh.2 a unique toexplore thecertification IPOs provide Thus,VC-backed opportunity innewequity roleof large blockshareholders offerings. Consistent with thefindings and Weiss (1991), ofBarry etal. (1990) andMegginson show that and thatsuch VC backing reducesthemagnitude of underpricing myresults I findthat lowerstheunderwriting thelevel of backingsignificantly spread.In addition, IPO underpricing and underwriter withthelevel of VC spreadare associated negatively The results are consistent withtheimplications of thecertification reputation. hypothesis. In their certification under modelBoothand Smith(1986) demonstrate conditions which a nonsalvageable bondto guarantee thequality can serveas an effective reputation of a firm. a Outside investors' topaya premium forthecertification provides willingness stream ofquasi-rents that does not tobe paidas longas thethird onlywillcontinue party cheat.The certification is can serveas an effective signalifthenonsalvageable quasi-rent thana one timewealthtransfer from falsecertification. Evidenceof thereputagreater tional to financial markets includes (1989) capitalreasoning DeAngelo(1981) and Beatty in accounting on therole of auditor and Ritter statement certification, reputation Beatty in certifying new equity and Megginson (1986) on theunderwriter reputation offerings, in reducing and Weiss (1991) on thepresence of VC firms Thereare IPO underpricing. a priorireasons tobelievethat VC firms havean incentive toestablish/or maintain strong a trustworthy in order to retain access to theIPO market. and Stein reputation Bygrave evidence that to themarVC firms taketheir (1989) provide usually portfolio companies keton an ongoing Lin basis to unwind showthat their and Smith (1995) equity holding. in theissuing VCs arerepeat market and that VCs tendto avoid selling players reputable In thisstudy, issues to maintain their 66 VC firms had morethan overpriced reputation.
1This is becauseof their close relations with investment banks.Venture Economics that (1987) reports among 76 venture 51 percent are affiliated withfinancial capital firms surveyed, corporations, includingbanks, investment banks,and insurance companies. 2 Lerner are high,and employprivate (1994) showsthatVC-backedfirms go publicwhenequityvaluations whenvalues are lower. financing

THE HYPOTHESIS

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enablesventure six portfolio firms 1979 to 1990. Establishing reputation go publicfrom Furtherand more to their talent resources entrepreneurial profitably. capitalists redeploy issuers about the as and Weiss a of more, Megginson (1991) suggest, reputation honesty will enable venture with institutional to establish capitalists relationships enduring in VC firms of shares who are vitally as investors and as purchasers investors important in IPOs. The certification described above yieldsfour testable First, implications. hypothesis becauseoutsiders lackreliable information aboutan issuer'svalueand growth opportunias suggested is required as a compensation fortheuncertainty, ties,IPO underpricing by If crediof firms can Rock(1986) and Beatty andRitter the VC (1986). provide presence willbe lower to investors ble information aboutthequality ofan issue,thecompensation forissueswith than forissueswithout Second,becauseventure VC-backing. VC-backing in theIPO processmay are proficient at taking firms capitalists public,their experience thatcan reducethe issuingcosts. help their portfolio companieschoose underwriters for ofunderwriting for VC-backed IPOs than should be lower Hence,themagnitude spread IPOs. Third, from of falsely non-VC-backed thecertification thepenalty sighypothesis, thanfora less reputable one. This implies certifier nalingis morecostlyfora reputable resultthat VC firms are less likely to cheatbecauseof thebonding mechanism reputable thepenalty. Rational investors are willing to pay moreforcompanies brought ing from VC firms to market VC firms. IPOs backed by reputable by reputable Accordingly, shouldhave less underpricing thanIPOs backed by less reputable VC firms. Fourth, firm the James thegreater theuncertainty value,thegreater (1992) arguesthat concerning and risk borne a positive relation is expected between Therefore, byunderwriters. spreads firm measures ofuncertainty value.Turning James's around, argument concerning issuing ifVC reputation VC firms can reducean issuer'suncertainty, IPOs backedby reputable should havelowerunderwriter than VC firms. IPOs backedbylessreputable spread I followthedatacollection To identify IPOs backedby VC firms, processof Barry, of VC-backedIPOs is collected Muscarella, (1990). Information Peavy,and Vetsuypens from theannualreport issuesof Venture Capital JournalFrom1979 to 1990 Venture Journal 651 IPOs made that hadreceived VC investment. Capital reported bycompanies Information on a VC firm'sdirectorship is collected fromthe and shareholding and "Principal andSellingShareholders" sections ofprospectuses, "Management" respecinformation on VC their the firms, tively. Descriptive founding yearsand size including of funds under is obtained from Pratt' s Guideto Venture management, Capital Sources. fund size reported Because venture firms seldom borrow for investments, capital money s from investors and the Pratt' Guide the amount of funds raised by typically represents a current and older venture firm. To a both avoid bias, managedby capital survivorship ' issuesof Pratt' s Guideare used.If an IPO does nothavea VC firm listedin thePratts is notclassified as a VC-backedissue. I obtain497 VC-backed Guide, theobservation between occurred IPOs. A sampleof 2,137 non-VC-backed IPOs of common stockthat 1979and 1990is identified the and SEC regisFinancing using Directory ofCorporate

DATA

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Table 1- Summary Statistics of VC-Backed and Non-VC-Backed Initial Public Offerings (medians in parentheses)
Variable Number of Issues Offer Size1 OfferPrice FirmValue* Issuer age Earning per Share Price Earning per ShareOver Offer Size Underwriting SpreadOver Offer Underwriter Ranking5 VC-Backed IPOs 497 $22.9 (17.3) $11.2 (10.0) $87.3 (60.0) 7.5 (5.0) $1.34 (0.58) 10.6% (4.8%) 7.4% (7.0%) 7.0 (7.5) Non-VCBacked IPOs 2137 $26.6 (7.3) $8.6 (8.0) $65.0 (20.3) 15.0 (5.0) $1.72 (0.67) 17% (6.5%) 8.3% (8.0%) 5.5 (5.5) t-statistic in Mean 1.74* 11.02*** 3.79 10.97*** 0.84 1.92* 14.93*** 14.93*** MannWhitney Ztest 13.49*** 10.88*** 15.98*** 1.35 1.37 3.21*** 13.44*** 11.61***

LIN_

*In millions ofdollars b Definedas theCarter level of thehighest of underwriters, where9 indicates and Manaster (1990) ranking and 0 represents thelowestlevel prestige * at the 10 percent level * Significant at the5 percent level Significant *** Significant at the1 percent level

tered The closingstock dateis obtained statistics priceof thefirst trading offering tape.3 about from theCenter forResearchin Security Pricesdata tape.VC backing represents of all IPOs. Consistent 18.8 percent with et al, thenumber of IPOs varieswidely Barry acrosstime. The years ofexceptionally are 1983,1986,and 1987. highIPO activity Table 1 compares IPOs usinga stancharacteristics between VC andnon-VC-backed dardt-test andMannmedian testSummary measures ofoffer size andoffer price Whitney in rows2 and 3, respectively. Consistent withthefindings of Megginson are presented that of non-VCand Weiss (1991), VC-backed median offer size than IPOs havea larger IPOs leads to a smaller thepresence of severallargenon-VC-backed backing, although In addition, meansize for offer VC-backed offers. VC-backed IPOs havea higher priceand firm non-VC-backed firms. as theoffer shares than value,defined pricetimes outstanding, Rows 5 through 7 present statistics of issuercharacteristics before summary goingpublic. Consistent has shorter with of Barry et al (1990), IPO withVC-backing thefindings nonVCWhileearnings yearsbefore goingpublicthan VC-backing. persharebetween backed and non-VC-backed IPOs are notsignificantly thelatter different, grouphas a of underwriting ratio than theformer measures higher earning/offer group. Summary price in rows8 and9. The results costsand underwriter arepresented revealthat VCprestige and backedfirms defined as gross overoffer havelower underwriting spreads, spread price, wheretheunderwriter is defined as the underwriters, employmore reputable reputation

3 The

statistics registered offering tapewas discontinued bytheSEC at theendof 1988.

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Table 2- Weighted Least Squares Regressions of Initial Return and UnderwritingSpread Against the Log of Offer Size, Age of the Issuing Firm, UnderwriterRanking, and Whether an Issue is VC-Backed. Dummy Equals 1 if an Issue Is Backed by VC Firms, 0 Otherwise
Panel A: Correlation Matrix of theExplanatory Variable(p-valuein parentheses). Size Issuer's Age Underwriter Log of Offer Ranking Size 1.000 Log of Offer (0.000) Issuer's Age -0.022 1.000 (0.266) (0.000) Underwriter 0.671 0.005 1.000 Ranking (0.001) (0.817) (0.000) 0.203 -0.133 0.253 Dummy (0.001) (0.001) (0.001) PanelB: Regression Results in parentheses). (t-statistics Variable Independent Intercept Size Log of Offer Issuer's Age Underwriter Rankinga Dummy 7 R2 Adjusted N InitialReturn (%) 18.20 (3.49***) -0.35 (-0.53) -5.82E-2 (-2.83***) -1.05 (-2.86***) -1.13 (-1.27) 0.06 2,180 Dummy

1.000 (0.000)

Variable Dependent Price (%) Underwriting Spread Over Offer 14.67 (48.02***) -0.58 (-13.86***) -2.37E-3 (-1.57) -0.22 (-12.25***) -0.15 (-3.59***) 0.59 2,158

a Definedas theCarter and Manaster level of of underwriters, where9 indicates thehighest (1990) ranking and 0 represents thelowestlevel prestige Significant at the 1 percent level

Carterand Manaster(1990) ranking.4 The finding is consistent withMegginsonand in Weiss's (1991) report thatventure are capable of helpingentrepreneurs capitalists underwriters. attracting quality To examinethecertification roleof VC firms, initial return and underwriting spread are regressed underwriter and size, age of theissuing firm, ranking, againstlog of offer whether theissue is VC-backed.The dummy equals one if an issue is backed by VC zerootherwise. firms, in Tables 2 and 3. Crosssectional testsof thecertification are reported hypothesis levelsarecomputed theWhite for (1980) correction Significance heteroskedasticity. using PanelA of Table 2 reports thecorrelation matrix of theindependent variables. Offer size is correlated with underwriter and thepresence of venture capital.Most positively ranking underthepresence of venture is associatedwithmoreprestige importantly, capitalists writers. when Column1 of PanelB inTable 2 reports theweighted leastsquaresresults
4 In the s of thetotal)IPOs' lead underwriters are in the Carterand Manaster' sample 2,181 (82.8 percent ofthe If thelead underwriter is notlistedin theCarter and Manaster' s listing, I use theranking (1990) listing. underwriter as theproxy forunderwriter comanaging prestige.

RESULTS

AND INTERPRETATIONS

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Table 3- Weighted Least Squares Regressions of Initial Return and UnderwritingSpread Against the Log of Offer Size, Age of the Issuing Firm, Lead VC Pre-lPO Shareholding, UnderwriterRanking, and VC Reputation Indicator
Panel A: Correlation Matrix of theExplanatory Variables(p-valuein parentheses). VC Pre-IPO Underwriter VC Reputation Log of Offer Size Indicator Issuer's Age Shareholding Ranking Size 1.000 Log of Offer (0.000) Issuer's Age 0.082 1.000 (0.067) (0.000) VC Pre-IPOShareholding -0.029 0.657 1.000 (0.510) (0.144) (0.000) Underwriter 0.588 0.101 -0.862 1.000 Ranking (0.001) (0.025) (0.055) (0.000) VC Reputation Indicator 0.165 1.000 0.011 0.114 0.169 (0.001) (0.000) (0.799) (0.011) (0.001) PanelB: Regression Results in parentheses) (t-statistics Variable Dependent Underwriting Spread Over Initial Return Price (%) IssuingCostc (%) (%) Offer -17.57 13.29 -4.20 (34.43***) (-1.84*) (-0.44) 3.77 -0.46 3.30 (3.54***) (-9.63***) (3.03***) -3.02E-2 -2.35E-3 -0.034 (-0.67) (-0.49) (-1.35) -0.12 -2.37E-3 -0.117 (-2.94***) (-0.84) (-2.25**) -1.29 -0.20 -1.48 (-3.36***) (-5.44***) (-3.91***) -1.61 -7.78E-2 -1.71 (-1.97**) (-2.09**) (-1.99**) 0.08 0.45 0.08 496 492 492

Variable Independent Intercept Size Log of Offer Years FromIncorporation to Offering Date Lead VC Pre-IPOShareholding Underwriter Ranking* VC Reputation Indicator0 R2 Adjusted N

a Definedas theCarter and Manaster of underwriters, where9 indicates thehighest level of (1990) ranking and 0 represents thelowestlevel prestige b The VC indicator is defined as theequallymeasures of VC firm'sage and portfolio reputation weighted size. The indicator can be expressed as:

. VCi

aAGE ^ .. indicator = 1 fsiZfr-Sz+ AGE, reputation j ^ STD^ STDA0E /

SIZE SIZE STD^ AGE, AGE STD^e = = = = = = Portfolio size ofVC firm i; Mean ofVC firms' sizes; portfolio Cross-sectional standard deviation ofVC portfolio size; i Age ofVC firm Mean of VC firms' ages; and Cross-sectional standard deviation of VC age.

where:

costis defined as thesummation of underpricing and underwriter Issuing spread * Significant at the10 percent level ** at the5 percent level Significant *** at the1 percent level Significant

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initialreturn is thedependent variable.While Ritter (1984) shows a negativerelation between initial return andoffer in thisstudy revealno significant relation size,theresults between them. The coefficient on theissuing firm's and statistically age is negative significant. The evidenceis consistent withRitter' s (1991) argument that old firms are less in lowerunderpricing. which results Consistent with Boothand Smith's(1986) cerrisky tification theinitial return is associated withunderwriter hypothesis, negatively ranking. In addition, whilethecoefficient on thedummy variableis negative, we are unableto make a strong attribution fromthe dummy withthe because of its highcollinearity underwriter prestige. The second regression, shownin column2, replaces the initialreturn with the withthefindings of Bhagatand Frost(1986), James underwriting spread.Consistent a negative relation exists between theunderwriter and theoffer (1992), and others, spread size. Whilethecoefficient on theissuer'sage is negative, thetat valueis notsignificant conventional levels.I also findthat thecoefficient on theunderwriter is related ranking with theunderwriter thecoefficient on thedummy variable is Moreover, inversely spread. and significant at the1 percent level.The evidence theexistence of negative impliesthat VC firms can reduceissuingcosts. The estimates in Table 2 suggestthat presented underwriter is themostimportant return determinant of initial and underwriting prestige in a complement of underwriter spread.The presenceof VC firms provides reputation lowerunderpricing and underwriting fortheeffects of offer size and costs,controlling issuer age. in Table 3 highlight The regression results therelation between VC reputation and To reflect the VC which as the a lead VC firm's is defined underpricing. reputation, age, date minuses the of the VC and the amount of fund under firm, offering year founding are chosenas proxies.5 The rationale is as follows. thelongera VC First, management firm has been in business, theless uncertainty themarket facesaboutwhether theVC firm is likelyto cheataboutan issuer'svalue.A longer also history mayprooperating videmarket with information VC managerial investment-unwindparticipants concerning decisions. This additional information allow investors to reducetheir ing may marginally estimate of ex anteuncertainty. a VC firm's the more credible the Hence,thelonger age, information it conveysabout the issuer. Second, venture must convince capitalists investors fund financial institutions, (individuals, etc.) of their corporations, managers, and their to nurture new to attract resources. Accordexpertise ability growing companies in In addithe amount of fund serve as a for VC the ingly, may proxy expertise industry. firm in a that a venture is involved tion,managing largeportfolio implies capital many in involving andmayneedIPOs toexitthose emerging companies companies. Frequency IPOs increasestheincentive forventure to protect their and precapitalists reputation in servestheir to sell shares future IPOs. The amount of fund also a option represents for the of The to the size of the the more there is lose fund, proxy penalty cheating. larger
5 A summarizes lead VC firms' are sizes,and ages. If twoor moreVC firms Appendix ownerships, portfolio in thesame IPO firm, I choose theVC firm thathas thelargest as thelead. If two or moreVC shareholding firms of theissueris have thesame amount of shareholding in thesame IPO firm, theone withdirectorship chosen.Our classification of lead venture fromGompers followsBarryet al (1990), but differs capitalist defines as thefirm that has beenon theboardthelongestas the thelead venture (1995b). Gompers capitalist lead venture capitalist.

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ifventure 1 therefore the information aboutan issuer.6 construct capitalists convey falsely firm VC reputation indicator theequallyweighted measures ofVC using age andportfolio size. Thereputation indicator is calculated as: 1 fsiZEj . . ,. - =r SIZE + AGEj-G^ - ==r =indicator , VQ reputation MDsize milage j y where: = = STDsize = AGEj = AGE = STDage = SIZEi SIZE Portfolio size of VC firm i; Mean of VC firms' sizes; portfolio ofVC portfolio Cross-sectional standard deviation size; i Age of VC firm MeanofVC firms' ages; and Cross-sectional standard deviation ofVC age.

Initialreturn control variis regressed indicator and four againsttheVC reputation ables: thelog of offer of the thepre-IPOshareholding size, theage of theissuingfirm, lead VC firm, and theunderwriter Panel A of Table 3 reports thecorrelation ranking. matrix of theindependent withbothundervariables. Offer size is associated positively In addition, writer andventure thehigher theventure reputation capital reputations. capital the regression the underwriter has. Panel B of Table 3 reports is, themore prestige results. Column1 indicates to theoffer thattheunderpricing is related size, positively consistent with the findings of Barry,Muscarella,Peavy, and Vetsuypens(1990). thecoefficient on theissuer'sage is negative, thecomputed t-statistic is not Although In with at conventional levels. the initial return is related addition, significant negatively thelead VC firm's This evidence that VC shareholdpre-IPOshareholding. suggests high a positive value.The results ceteris that, ingconveys signalaboutan issuer'sfirm imply 1 a firm's on lead VC paribus, increasing by percent, average, pre-IPOshareholding in an additional in 0.12 percent results reduction of IPO underpricing. consisMoreover, tentwiththecertification the with the initial return is associated hypothesis, inversely 1 underwriter at the is related level. the Last, ranking percent significant negunderpricing Musindicator. The evidenceis consistent withBarry, ativelywiththeVC reputation that VC firms can reduceIPO carella,Peavy,and Vetsuypens's (1990) argument quality underpricing. In column 2 initial return is replaced with The results showthat spread. underwriting mostof theexplanatory variables topredict theunderwriting are Consisspread negative. tent withthereported results ofJames the underwriter is associated (1992), spread negawith offer size. Although thecoefficients on theissuer'sage andthelead VC firm's tively their are negative, t-statistics are notsignificant at conpre-IPOshareholding computed
6 I thank an referee forpointing thisout. anonymous

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are indicator bankprestige and theVC reputation ventional levels.Whiletheinvestment are and the coefficients on both correlated, signifiregressors negative statistically highly level. cantat the5 percent and underwriter In column of underpricing as thesummation 3 issuing cost,defined VC reputation withtheprediction, is used as thedependent variable. Consistent spread, withissuingcost.The results are related and pre-IPOshareholdings suggest negatively on ceteris a lead VC firm's that, by 1 percent, paribus,increasing pre-IPOshareholding in an additional in $420,650in issuing costs.7 results reduction average, in Tables 2 and 3 revealsthat new equityissues withVC The evidencepresented This evidenceis investments are metwith a lowerunderpricing and underwriting spread. etal (1990) andMegginson andWeiss (1991). The consistent with thefindings of Barry discussedby withthenotionof thecertification results are also consistent hypothesis Boothand Smith (1986). VC backing. forfirms withand without This paperinvestigates IPO underpricing and underwriter This paperalso examinestherelation betweenVC reputation spread. thatVC backing thispaperdocuments Thereare twocontributions of thisstudy. First, and that suchbackingsignifireducesthemeanand mediandegreeof IPO underpricing in both is found banks.Support lowersunderwriting byinvestment cantly spread charged withthenotions This is consistent thebivariate t-test and thecross-sectional regressions. to theceranda complement ofa VC firm can be a partial substitute for that thepresence as large block tification bankers. Second, venture capitalists, by investment provided The rolein certifying thevalueofa new equity shareholders, offering. playan important notsignaledby theunderincremental information qualityof their reputation provides is able to reduce VC reputation with thecertification writer alone.Consistent hypothesis, IPO underpricing andunderwriting costs.
Journalof for'Lemons': Qualityand theMarket 1. Akerlof, Mechanism," GM"The Market Quarterly 84 (1970), pp. 488-500. Economics, Journalof Financial in theIPO Market," 2. Allen,F., and G. Faulhaber, "Signaling by Underpricing 23 (1989), pp. 303-323. Economics, and Negotiated in Competitive 3. Bhagat,S., and P. Frost,"IssuingCosts to ExistingShareholders 15 (1986), pp. 213-232. Journal Underwritten PublicUtility Offers," Equity ofFinancialEconomics, "The Role of Venture 4. Barry, J. PeavyIII, and M. Vetsuypens, C, C. Muscarella, Capitalin theCreJournal 27 (1990), pp. 447-471. ationofPublicCompany," ofFinancialEconomics, of InitialPublic and the Underpricing "Investment 5. Beatty,R., and J. Ritter, Banking,Reputation 15 (1986), pp. 213-232. Journal Offerings," ofFinancialEconomics, The Accounting and thePricing of InitialPublicOfferings," 6. Beatty, Review, R., "Auditor Reputation 64 (1989), pp. 693-709. Journal and theCertification 7. Booth,J.,and R. Smith, of Hypothesis," "CapitalRaising, Underwriting FinancialEconomics, 15 (1986), pp. 261-281. 7 The of theoffer size. Thatis, theaverageissuing averageissuingcost of VC-backedIPOs is 15.7 percent to $3,595,300. costis equivalent

CONCLUSION

REFERENCES

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APPENDIX A- SUMMARY STATISTICS OF LEAD VC PRE-IPO SHARE HOLDING AND PROXY FOR VC REPUTATION
Variables Lead VC Finn's Pre-IPOShareholding Amount ofFundUnder Management bytheLead VC Finna Before IPOs Age of theLead VC Firm a In millions ofdollars. Mean 17.3% 168.73 12.82 Standard Deviation 13.4% 215.18 9.03