Michael R. Vetsuypens

The Role of Venture Capital in the Creation of Public Companies: Evidence from the Going-Public Process

Explores the nature of the venture capital investment through examination of initial public offerings (IPOs). Venture capitalists are often active investors who participate in management of the firms. The venture capital investment can be ended in a variety of ways, with the sale of the companys shares through a public offering being the most prevalent. Data used in the analysis includes 433 IPOs that were backed by venture capitalists from 1978 to 1987 and 1,123 IPOs without such backing. Results show that venture capitalists tend to focus on certain industries, in order to develop an expertise. In this case, the focus was on computer equipment, electrical and electronic components, instrumentation, and business services. The median offering size of firm IPOs backed by venture capitalists was larger than the size of those not backed. Based on analysis of the full sample, it appears that venture capitalists are able to bring public the firms they back earlier than would have otherwise been possible. This likely occurs because of the industries in which the venture capitalists focus. Venture capitalists take a monitoring role, demonstrated by serving on the board, maintaining the investment beyond the IPO, and holding a large equity position in a portfolio firm. Finally, it is determined that investor uncertainty is reduced with the quality of the venture capitalists monitoring skill. A decrease in investor uncertainty was found to decrease IPO underpricing. These findings support the notion that venture capitalists play an important role in new enterprise. (SRD)

A simple test of Baron's model of IPO underpricing☆

Abstract This paper tests Barons (1982) model of initial public offering (IPO) underpricing. That model relies on information asymmetries between issuers and underwriters and predicts that offer prices will be lower than would prevail in the absence of asymmetric information. We examine the initial public offerings of 38 investment banks that went public in the period 1970–1987 and participated in the distribution of their own securities. We find that contrary to the implication of Barons model such self-marketed offerings are characterized by statistically significant underpricing comparable to that of other IPOs.

Stock splits: Signaling or liquidity? The case of ADR 'solo-splits'

Abstract Stock splits should have no effect on firm value in perfect capital markets, yet stock prices increase on split announcements. The two traditional explanations are information signaling and improved liquidity for shares that trade at lower prices. We investigate these explanations by studying splits of American Depositary Receipts (ADRs) that are not associated with splits in their home-country stock, and which represent unique illustrations of the effect of liquidity. We interpret our findings as supportive of the liquidity explanation of stock split announcement effects.

Underwriter warrants, underwriter compensation, and the costs of going public

Abstract Warrants are sometimes granted to underwriters in initial public offerings as part of the compensation for their services. We examine the effects of underwriter warrants in a sample of firm commitment offerings from 1983 through 1987. These warrants represent a significant component of the compensation to the underwriter and are associated with greater total costs of going public. Warrants appear to provide a mechanism for circumventing otherwise binding regulatory constraints, allowing issuers to offer extra compensation to underwriters marketing especially risky offerings.

Are Stock Splits Credible Signals? Evidence from Short-Interest Data

We propose the change in short interest as a new metric of the signaling strength of a corporate event. If an event signals positive information, short interest should decline at the event announcement. We study short interest around stock split announcements made by NYSE firms during 1990-94. Short interest does not decline around stock splits, which suggests that the typical split does not convey a positive signal. However, short interest declines for the subset of the sample characterized by favorable industry-adjusted pre-split performance. Short interest increases significantly for firms that experience post-split liquidity improvements.