Conflicts of interest and the performance of venture-capital-backed IPOs: A preliminary look at the UK

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Abstract
We document the incidence of initial public offerings (IPOs) issued by UK companies with existing venture capital investors and sponsored (and underwritten) by issuing houses that are parents or affiliates of the venture capital backers. The effects on the performance of the stock offering of the resulting conflicts of interest between the venture capitalist-affiliated sponsors and the investors taking up the stock is examined. Contrary to the conflicts-of interest hypothesis, IPOs underwritten by VC affiliates perform better in the long-term than other IPOs. We also examine the role of the reputation of the financial firms involved in the IPO. The long-term performance of UK IPOs is found to be positively related to the reputation of the venture capital backers. In the short-term, IPO returns appear to be related to the prestige of the sponsor rather than the venture capitalist in that top fifteen underwriters are associated with lower short-returns. Although there is evidence of higher initial returns in IPOs where the sponsor and venture capitalist are affiliated, this is offset by an approximately equal reduction in initial returns if the venture capitalist is associated with an issuing house which may or may not act as the actual IPO sponsor. Thus, the net effect is that backing by venture capitalists with links to issuing houses reduces initial returns but only if those affiliates are in fact not employed as the actual sponsors to the offerings.

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