How much do VCS and underwriters matter? A comparative investigation of venture capitalist and underwriter effects on IPO underpricing

Abstract

Research on initial public offerings (IPOs) suggests that underwriters as well as venture capitalists (VCs) affect IPO underpricing. However, the magnitude of the effect of VCs on underpricing remains unclear. Are VCs as important as underwriters? We conduct a variance decomposition analysis to compare these two influences. Our results indicate that VCs are of greater importance, and we suggest that VCs’ superior evaluative capacity and signal legitimacy may be responsible for their effects.

Keywords:

• Information asymmetry
• initial public offerings
• underpricing
• venture capital
• underwriters

Notes

1. For instance, McGahan and Victer (2010) used the simultaneous ANOVA approach in order to include the effect of a continuous variable. The variance components technique, by contrast, does not allow for inclusion of such variables.