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Journal of Corporate Finance Vol. 59 2019

Financial distress risk in initial public offerings: How much do venture capitalists matter?

William L. Megginson1,2; Antonio Meles3; Gabriele Sampagnaro4; Vincenzo Verdoliva5,6

1 University of Oklahoma · 2 King Fahd University of Petroleum and Minerals · 3 University of Campania "Luigi Vanvitelli" · 4 Parthenope University of Naples · 5 Kingston University · 6 University of London

Abstract

Using a sample of 1593 US firms that go public between 1990 and 2007, we find that VC-backed IPOs experience less financial distress risk post-offering than do comparable non-VC-backed IPOs. After controlling for endogeneity, we find this is related to the screening done by VC-investors, who select firms with lower risk of financial distress and by VCs reducing risks when they finance portfolio firms. We find companies backed by more reputable VCs exhibit higher levels of financial distress risk even when they show superior operating performance, due to their highly levered capital structure and investment in relatively illiquid assets.

DOI
10.1016/j.jcorpfin.2016.09.007
Volume
59
Pages
10-30
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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