Joelson Oliveira Sampaio

Private Equity and Venture Capital in Brazil: An Analysis of its Recent Evolution

This article focuses on the main idiosyncrasies of the PEVC in Brazil and its evolution from 2004 to 2009. The main idiosyncrasies are the participation of investors in the investment process, absence of leveraged buyouts, shared control and use of special rights to compensate for the absence of a controlling stake. The main changes observed are the increase of private equity investments vis-a-vis venture capital, of the efficiency of managers in the selection process, of the use of special rights to compensate for the lack of control in the portfolio companies such as veto power, of the use of arbitration panels for the resolution of conflicts, and of the participation of limited partners in the investment process.

Venture Capital and Earnings Management in IPOs

We investigate earnings management (EM) in IPOs and the role of private equity/venture capital (PEVC) in hampering such practice. We show that when analyzing EM, PEVC and non-PEVC-sponsored firms should be treated as different samples: if one splits the sample, R-squared increases drastically for both subsamples. For PEVC-sponsored IPOs EM is marginal, mostly related to firms’ characteristics and little related to the phases of the IPOs. Differently, for non-PEVC-sponsored IPOs EM is significant, mostly related to the phases of the IPO and little related to firms’ characteristics. Finally, the reputation of the auditor is important only for PEVC-sponsored IPOs, suggesting that the choice of auditor is more meaningful for PEVC-sponsored firm, i.e, the choice of reputed auditor represents a compromise not to manage earnings.

Dotcom Price Spiral

We show that during the bubble implied growth rates coming from the underpricing of IPO market explains short term returns on the NASDAQ index. This result remains even if we replace actual underprice for others different instruments for underpricing that are based on predetermined variables and not correlated to market returns. We also do placebo tests to assess the relation between underpricing and NASDAQ returns over other periods. We show that growth proxies that are not contaminated by the booms and busts of the stock market are uncorrelated with the returns on the NASDAQ index in periods outside the bubble.

Dotcom Extreme Underpricing

We conjecture that the Dotcom abnormal underpricing resulted from the emergence a large cohort of firms racing for market leadership/survivorship. Fundamentals pricing at the IPO was part of their strategy. Consistent with our conjecture, firms’ strategic goals and characteristics fully explain the abnormal underpricing. Contrary to alternatives explanations, underpricing was not associated with top underwriting; there was no deterioration of issuers’ quality; and top underwriters and analysts became more selective.