Masulis Nahata (2011) - Venture Capital Conflicts Of Interest

This page is referenced under:

• VC Acquisitions Paper
• VC Acquisitions Lit Review

Reference

Masulis, R.W. and Nahata, R. (2011), "Venture capital conflicts of interest: Evidence from acquisitions of venture-backed firms", Journal of Financial and Quantitative Analysis, Vol. 46, No. 02, pp. 395-430 (pdf)

@article{masulis2011venture,
  title={Venture capital conflicts of interest: Evidence from acquisitions of venture-backed firms},
  author={Masulis, R.W. and Nahata, R.},
  journal={Journal of Financial and Quantitative Analysis},
  volume={46},
  number={02},
  pages={395--430},
  year={2011},
  publisher={Cambridge Univ Press},
  abstract={We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find that VC backing leads to significantly higher acquirer announcement returns, averaging 3%, even after controlling for deal characteristics and endogeneity of venture funding. This leads us to investigate whether some VCs have interests that conflict with those of other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.},
  filename={Masulis Nahata (2011) - Venture Capital Conflicts Of Interest.pdf}
}

Working Paper Version (pdf)
@techreport{masulis2006venture,
  title={Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture Backed Targets},
  author={Masulis, R.W. and Nahata, R. and Way, O.B.B.},
  year={2006},
  institution={Working Paper},
  abstract={We study the relation between venture capital (VC) backing and the profitability of privately held firm acquisitions. Controlling for endogeneity in venture funding, we document that acquisitions of VC-backed targets lead to significantly higher acquirer announcement returns than non VC-backed acquisitions. Acquirer announcement returns are also substantially larger when the acquisitions are equity financed. We evaluate five hypotheses, four of which pertain to various VC conflicts of interest with other investors, to explain the cross section of acquirer announcement returns and target purchase price-to-book value ratios. We find evidence that higher acquirer returns and lower target purchase price-to-book value ratios are in part caused by liquidity pressures on VC funds nearing their termination dates. Acquisitions of targets backed by VCs with close financial ties to the acquirers have significantly higher acquirer announcement returns and lower target purchase price-to-book value ratios. This evidence is consistent with a VC moral hazard problem where VC incentives to obtain higher target purchase prices are compromised by their dual financial relationships. Corporate venture capitalists (CVC) have strategic as well as financial goals, which create conflicts with other venture investors. Consistent with CVC conflicts of interest, acquisitions of firms backed by CVCs exhibit higher acquirer stock returns. We also uncover evidence that the shifting strategic objectives of CVC parents and their weak commitment to the VC market lead to rapid exits from their VC portfolio firms and higher wealth gains for acquiring firms. In summary, we find support for several hypotheses concerning VC conflicts of interests with other investors for explaining higher acquirer announcement returns when targets are VC-backed.},
  filename={Masulis Nahata Way (2006) - Venture Capital Conflicts Of Interest.pdf}
}

Abstract

We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find that VC backing leads to significantly higher acquirer announcement returns, averaging 3%, even after controlling for deal characteristics and endogeneity of venture funding. This leads us to investigate whether some VCs have interests that conflict with those of other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.