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Reducing Asymmetric Information in Venture Capital Backed IPOs

Author

Listed:
  • Escobari, Diego
  • Serrano, Alejandro
Abstract
Purpose – The purpose of this paper is to model asymmetric information and study the profitability of venture capital (VC) backed initial public offerings (IPOs). Our mixtures approach endogenously separates IPOs into differentiated groups based on their returns’ determinants. We also analyze the factors that affect the probability that IPOs belong to a specific group. Design/methodology/approach – We propose a new method to model asymmetric information between investors and firms in VC backed IPOs. Our approach allows us to identify differentiated companies under incomplete information. We use a sample of 2,404 U.S. firms from 1980 through 2012 to estimate our mixture model via maximum likelihood. Findings – We find strong evidence that companies can be separated into two groups based on how IPO returns are determined. For companies in the first group the results are similar to previous studies. For companies in the second group we find that profitability is mainly affected by the reputation of the seed VC and capital expenditures. Tangible assets and age help explain group affiliation. We also motivate our findings for a continuum of heterogeneous IPO groups. Practical implications – The proposed mixture approach helps decrease asymmetric information for investors, regulators, and companies. Originality/value – Our mixture methods help decrease asymmetric information between investors and firms improving the probability of making profitable investments. Separating between groups of IPOs is crucial because different determinants of an IPO operating performance can potentially have opposite effects for different groups.

Suggested Citation

  • Escobari, Diego & Serrano, Alejandro, 2015. "Reducing Asymmetric Information in Venture Capital Backed IPOs," MPRA Paper 68140, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68140
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    References listed on IDEAS

    as
    1. Tian, Xuan, 2011. "The causes and consequences of venture capital stage financing," Journal of Financial Economics, Elsevier, vol. 101(1), pages 132-159, July.
    2. Gan, Li & Huang, Feng & Mayer, Adalbert, 2015. "A simple test for private information in insurance markets with heterogeneous insurance demand," Economics Letters, Elsevier, vol. 136(C), pages 197-200.
    3. Escobari, Diego, 2014. "Estimating dynamic demand for airlines," Economics Letters, Elsevier, vol. 124(1), pages 26-29.
    4. Gompers, Paul A, 1995. "Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-1489, December.
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    11. Jain, Bharat A & Kini, Omesh, 1994. "The Post-Issue Operating Performance of IPO Firms," Journal of Finance, American Finance Association, vol. 49(5), pages 1699-1726, December.
    12. Krishnan, C. N. V. & Ivanov, Vladimir I. & Masulis, Ronald W. & Singh, Ajai K., 2011. "Venture Capital Reputation, Post-IPO Performance, and Corporate Governance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(5), pages 1295-1333, October.
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    More about this item

    Keywords

    Venture Capital; Mixture Model; Initial Public Offerings;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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