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Diamonds in the rough: The value of scouting for early-stage funding

Author

Listed:
  • Amaya, Diego
  • Brolley, Michael
  • Smith, Brian F.
Abstract
IPOs of small early-stage companies have largely declined in the last few decades. Governments and exchanges have responded with new regulations to encourage access for small firms to public markets. Critics caution, however, that lower standards for going public may be worse for investors. In this paper, we document one exchange’s approach to encourage small IPOs: founders establish shell companies through which to scout and promote funding of early-stage companies. We find that founders earn compensatory returns for their search role, and that the average long-term performance of these companies is similar to that of small conventional IPOs, underscoring that conventional IPOs may fail to identify or screen companies of similar quality asymmetrically. Consistent with prior literature on small IPOs, the long-term post-IPO performance of both the conventional and alternative funding processes are highly right-skewed and poor, on average, but not statistically different.

Suggested Citation

  • Amaya, Diego & Brolley, Michael & Smith, Brian F., 2020. "Diamonds in the rough: The value of scouting for early-stage funding," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:ecofin:v:52:y:2020:i:c:s1062940819303158
    DOI: 10.1016/j.najef.2019.101131
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Small IPOs; Long-term underperformance; Venture exchange;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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