Journal of Corporate Finance Vol. 31 2015
Top VC IPO underpricing
Abstract
Before the IPO bubble burst, the first day return for IPOs backed by top VC firms was double that of non-top VC IPOs. Top VC IPOs were also twice as likely to receive all-star analyst coverage and suffered twice as large negative returns upon lockup expiration. We argue that this was not a coincidence. Underwriters benefited from underpricing vis-à-vis allocation strategies whereas VCs gain from information momentum which allows them to cash-out at higher prices at lockup expiration. All-stars are a scarce resource underwriters allocate to their best clients (top VCs) who bring them repeat business. Post-bubble, regulatory shocks restricted preferential IPO allocations and reduced the value of all-star coverage. Consequently, these relations disappeared indicating that regulatory changes likely had the desired effect.
- DOI
- 10.1016/j.jcorpfin.2015.01.016
- Volume
- 31
- Pages
- 186-202
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref