Underpricing of venture backed IPOs: a meta-analysis approach

ABSTRACT

Listing firms are subject to underpricing mainly because of asymmetries of information, but IPOs backed by a venture capitalist are generally found to be subject to less underpricing. Although this condition is commonly verified by the empirical evidence, a consistent number of studies finds contrasting results. This paper aims to answer to the question: do venture capitalists effectively reduce underpricing at IPO? Evidence provides a negative answer, with venture-backed IPOs having higher underpricing especially in US markets. Meta-regression results confirm the different effect of VC between US and European IPOs. Results overall suggest that other explanations on underpricing might hold in US markets.

KEYWORDS:

• Venture capital
• underpricing
• IPO
• meta-analysis
• meta-regression

JEL Codes:

• G24
• G10
• G32

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Alessandra Tanda http://orcid.org/0000-0002-6885-899X

Giancarlo Manzi http://orcid.org/0000-0003-0703-9998

Notes

1 The I² is calculated with the following formula, where Q is the Cochran’s heterogeneity statistic and df is the degree of freedom:$I^2=\frac{Q-df}{Q}\times 100\text{\%}.$

2 Historically, as tracked by the World Bank database (https://data.worldbank.org) in the US market there are more listed companies than in the European ones. Additionally, the weight of the market capitalisation of listed companies on GDP is also higher for the USA than for the European countries. Overall, for the US markets as at 2017 it was around 166%, while for the whole Euro Area it was around 77.89%. The data for the European Union is not available at that date.

3 The vast majority of the top-30 venture capitalists in the ranking provided by CB Insigths (a data provider for the private capital markets) are US VCs. See https://www.cbinsights.com/research/top-venture-capital-partners/. The same holds for the list provided by thefunded.com/.

4 See for instance Boskovic, Cerruti, and Noel (2010) on the differences between the European MiFID and the US National Market System.

5 See Sterne and Egger (2001) for a discussion on asymmetric bias in funnel plots.