VC Acquisitions Lit Review
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This is the main VC Acquisitions Lit Review page. It details searches for papers related to the intersection of venture capital, acquisitions and explaining abnormal returns. The results are currently posted as BibTeX entries, sorted by topic. Each entry has an abstract amd a filename field included. All of the papers have been downloaded are on Ed's Sauder workstation. However, the 'Key Papers' have their own wiki pages and their files are posted for download.
Contents
Key Papers
Masulis Nahata (2011) - Venture Capital Conflicts Of Interest (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} }
Gompers Xuan (2006) - The Role Of Venture Capitalists In The Acquisition Of Private Companies (pdf) @article{gompers2006role, title={The role of venture capitalists in the acquisition of private companies}, author={Gompers, P. and Xuan, Y.}, journal={Unpublished working paper. Harvard University}, year={2006}, abstract={In this paper, we examine the characteristics of acquisition of private firms by public companies and explore the impact that venture capital-backing has on the acquirer's characteristics, form of payment, announcement returns, as well as long-run stock price and operating performance. We find that compared to the acquirers of other private companies, those firms that acquire private venture capital-backed companies tend to be larger, have higher Tobin's Q, and are more likely to use equity in the transaction and buy companies in a related industry. The market tends to react more negative to announcement of the acquisition of a venture capital-backed company, but the long-run stock market and operating performance is superior than other private acquisitions. We find that the use of stock and related transaction predicts better long-run performance. Our results suggest that the acquirers of private venture capital-backed companies do not suffer any adverse selection problem and continue to have superior performance in the long-run. }, filename={Gompers Xuan (2006) - The Role Of Venture Capitalists In The Acquisition Of Private Companies.pdf} }
Gompers Xuan (2008) - Bridge Building In Venture Capital Backed Acquisitions (pdf) @book{gompers2008bridge, title={Bridge building in venture capital-backed acquisitions}, author={Gompers, P.A. and Xuan, Y.}, year={2008}, publisher={Harvard Business School}, abstract={This paper studies the role of common venture capital investors in alleviating asymmetric information between public acquirers and private venture capital-backed targets. We find that acquisition announcement returns are more positive for acquisitions in which both the target and the acquirer are financed by the same venture capital firm. Similarly, having a common investor increases both the likelihood that a transaction will be all equity-financed as well as the fraction of stock in the overall acquisition payment. In addition, an acquisition is more likely to take place when there is a common venture capital investor linking the acquirer and the target. Our results suggest that common venture capital investors can form a bridge between acquiring and target firms that reduces asymmetric information associated with the transaction for both parties.}, filename={Gompers Xuan (2008) - Bridge Building In Venture Capital Backed Acquisitions.pdf} }
Benson Ziedonis (2010) - Corporate Venture Capital And The Returns To Acquiring Portfolio Companies (pdf) @article{benson2010corporate, title={Corporate venture capital and the returns to acquiring portfolio companies}, author={Benson, D. and Ziedonis, R.H.}, journal={Journal of Financial Economics}, volume={98}, number={3}, pages={478--499}, year={2010}, publisher={Elsevier}, abstract={A prominent motive for corporate venture capital (CVC) is the identification of entrepreneurial-firm acquisition opportunities. Consistent with this view, we find that one of every five startups purchased by 61 top corporate investors from 1987 through 2003 is a venture portfolio company of its acquirer. Surprisingly, our analysis reveals that takeovers of portfolio companies destroy significant value for shareholders of acquisitive CVC investors, even though these same investors are “good acquirers” of other entrepreneurial firms. We explore numerous explanations for these puzzling findings, which seem rooted in managerial overconfidence or agency problems at the program level.}, filename={Benson Ziedonis (2010) - Corporate Venture Capital And The Returns To Acquiring Portfolio Companies.pdf} }
Acquisition Papers
VC Backed
@article{kamath2008matchmaking,
title={Matchmaking and Rent Seeking: An Empirical Analysis of Mergers of Venture-Backed Companies},
author={Kamath, R. and Yan, J.},
year={2008},
abstract={Venture capitalists claim to add value to their portfolio companies through their extensive networks. This paper documents a rent-seeking behavior that accompanies this VC keiretsu effect. Using a sample of 570 mergers between venture-backed companies, we find that deals in which the acquirer and target are backed by a common venture investor are followed by substantially worse stock returns and operating performance for the acquirer, after controlling for an array of deal characteristics. Moreover, venture-backed acquirers pay higher multiples for targets backed by a common VC. Finally, stock (as the method of payment) is chosen more often in mergers of companies backed by a common VC. Our results suggest that while VCs facilitate the matching of merging firms, they also use their influence to extract rents from acquirer shareholders. },
filename={Kamath Yan (2008) - Matchmaking And Rent Seeking.pdf}
}
@article{arikan2010newly,
title={Do newly public acquirers benefit or suffer from their pre-IPO affiliations with underwriters and VCs?},
author={Arikan, A.M. and Capron, L.},
journal={Strategic Management Journal},
volume={31},
number={12},
pages={1257--1289},
year={2010},
publisher={Wiley Online Library},
abstract={We examine whether pre-IPO affiliations affect post-IPO corporate events, namely acquisitions. On the one hand, newly public acquirers may benefit from their pre-IPO affiliations through residual signaling value or/and resource-related benefits. On the other hand, newly public acquirers may suffer from those affiliations when conflicts of interests arise during the post-IPO period. Equity underwriters may have incentive to promote non–value-creating acquisitions (Type II error), and venture capitalists (VCs) may have incentive to forgo strategically important acquisitions (Type I error). Drawing on a sample of 4,029 acquisitions made by 717 newly public firms, we find that on average the announcement of an acquisition by a newly public acquirer elicits a positive response from investors. The market views more favorably the acquisitions announced by newly public acquirers associated with prestigious equity underwriters, but this reaction becomes negative when the lead underwriter is retained as the acquisition advisor. The market reacts more favorably to acquisitions announced by VC-backed newly public acquirers, but only when those VCs are committed to a longer lockup period. The effects of pre-IPO affiliations on expected returns are stronger for newly public acquirers with a high intangible resource base and persist throughout the three-year post-IPO period (across each subsequent acquisition announcement). },
filename={Arikan Capron (2010) - Do Newly Public Acquirers Benefit Or Suffer From Their Pre Ipo Affiliations With Underwriters And Vcs.pdf}
}
@article{jonesinformation,
title={The Information Role of Venture Capitalists: How Venture Capitalists Affect the M\&A Decisions of Their Previous IPOs},
author={Jones, C.},
year={2008},
abstract={Given the level of involvement between a venture capitalist and a portfolio firm’s management, and a VC’s propensity to facilitate collaborations within its network, it is likely that a VC continues to affect a firm beyond a successful public offering. This could manifest itself in many ways, including the M&A decisions of management, with a VC facilitating and encouraging mergers and acquisitions within its network. This paper seeks to answer two questions. First, what role do venture capital firms play in the acquisition decisions of their previous IPOs? And second, what effect does this have on acquisition announcement returns? To do this, I focus on the acquisition activity of VC-backed IPOs, specifically their acquisitions of VC-backed private targets. I find that venture capitalists continue to affect firm M&A decisions well after the initial public offering, but that this is generally of benefit to acquiring firm shareholders. The information sharing that occurs between a VC and a firm’s management appears to result in value-enhancing acquisitions of VC-backed private targets. This paper documents a further mechanism through which venture capitalists can add value to corporations.},
filename={Jones (2008) - The Information Role Of Venture Capitalists.pdf}
}
Ivanov Xie (2010) - Do Corporate Venture Capitalists Add Value To Start Up Firms (pdf) @article{ivanov2010corporate, title={Do Corporate Venture Capitalists Add Value to Start-Up Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies}, author={Ivanov, V.I. and Xie, F.}, journal={Financial Management}, volume={39}, number={1}, pages={129--152}, year={2010}, publisher={Wiley Online Library}, abstract={We present evidence that corporate venture capitalists (CVCs) add value to start-up companies only when the start-ups have a strategic fit with the parent corporations of CVCs. We find that CVCs provide a variety of services and support that suit the specific needs of start-ups operating in different industries. CVC-backed start-ups are able to obtain higher valuations at the IPO than non-CVC-backed ones, and the value added by CVCs concentrates in start-ups with a strategic overlap with CVC parents. Entrepreneurial companies with strategic CVC backing also receive higher takeover premiums when they become acquisition targets.}, filename={Ivanov Xie (2010) - Do Corporate Venture Capitalists Add Value To Start Up Firms.pdf} }
Non-VC Backed (but relevant)
@article{ishii2010acquirer,
title={Acquirer-target social ties and merger outcomes},
author={Ishii, J. and Xuan, Y.},
journal={SSRN eLibrary},
year={2010},
abstract={This paper investigates the effect of social ties between acquirers and targets on merger performance. Using data on educational background and past employment, we construct a measure of the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms. We find that between-firm social ties have a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm’s CEO and a larger fraction of the target firm’s pre-acquisition board of directors remain on the board of the combined firm after the merger. This also holds true at the level of individual target directors. An individual target director is more likely to be retained on the post-merger board if that target director has more social connections to the acquirer’s directors and senior executives. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to occur between two firms that are well-connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision-making and lower value creation for shareholders overall. },
filename={Ishii Xuan (2010) - Acquirer Target Social Ties And Merger Outcomes.pdf}
}
IPO Papers
Underpricing
VC Specific Pricing
@article{brau2004venture,
title={Do Venture Capitalists Add Value to Small Manufacturing Firms? An Empirical Analysis of Venture and Nonventure Capital-Backed Initial Public Offerings},
author={Brau, J.C. and Brown, R.A. and Osteryoung, J.S.},
journal={Journal of Small Business Management},
volume={42},
number={1},
pages={78--92},
year={2004},
publisher={Wiley Online Library},
abstract={We examine a set of small, venture capital (VC)-backed manufacturing firms and compare it to a control sample of nonVC-backed manufacturing firms going public between 1990 and 1996. We use the degree of underpricing, three-year sales growth, three-year cumulative stock return, and three-year survivability as measures of success. First, we test if the presence of VC backing results in significant differences in success between the two samples. Next, we test if certain VC and deal characteristics are discriminators within the VC-backed sample of firms. Despite previous literature, which argues for either inferior or superior VC post-initial public offering (IPO) performance, these tests indicate no significant differences between VC- and nonVC-backed firms. Additionally, it is found that VC and deal characteristics are not discriminating factors within the VC sample.},
filename={Brau Brown Osteryoung (2004) - Do Venture Capitalists Add Value To Small Manufacturing Firms.pdf}
}
@article{li2004venture,
title={Venture capital investments by IPO underwriters: certification, alignment of interest or moral hazard?},
author={Li, X. and Masulis, R.},
year={2004},
abstract={We study IPO pricing when underwriters are venture capital investors in issuers and test three hypotheses concerning the effects of underwriter share ownership on the IPO underwriting and pricing processes. We find that venture investments by underwriters significantly reduce IPO underpricing; and the result is stronger for lead underwriters. This evidence is consistent with both underwriter certification and improved underwriter alignment of interests with issuers. The fall in underpricing is substantially greater when there is greater uncertainty about IPO valuation, which further supports the underwriter certification effect. Controlling for endogeneity effects does not change our conclusions. Finally, lead underwriter venture investment in IPO issuers also reduces underwriter gross spreads. Overall, the evidence is consistent with an underwriter certification effect and to a lesser degree an underwriter-issuer alignment of interest effect and inconsistent with an IPO conflict of interest effect. },
filename={Li Masulis (2004) - Venture Capital Investments By Ipo Underwriters.pdf}
}
@article{barry1990role,
title={The role of venture capital in the creation of public companies: Evidence from the going-public process},
author={Barry, C.B. and Muscarella, C.J. and Peavy, J.W. and Vetsuypens, M.R.},
journal={Journal of Financial Economics},
volume={27},
number={2},
pages={447--471},
year={1990},
publisher={Elsevier},
abstract={We examine an exhaustive set of initial public offerings (IPOs) by venture-capital-backed companies between 1978 and 1987. We find that venture capitalists specialize their investments in firms to provide intensive monitoring services. Consistent with their monitoring role, the venture capitalists take concentrated equity positions, maintain their investment beyond the IPO, and serve on the boards of their portfolio firms. The quality of their monitoring services appears to be recognized by capital markets through lower underpricing for IPOs with better monitors.},
filename={Barry Muscarella Peavy Vetsuypens (1990) - The Role Of Venture Capital In The Creation Of Public Companies.pdf}
}
@article{gompers1996grandstanding,
title={Grandstanding in the venture capital industry},
author={Gompers, P.A.},
journal={Journal of Financial economics},
volume={42},
number={1},
pages={133--156},
year={1996},
publisher={Elsevier},
abstract={I develop and test the hypothesis that young venturecapital firms take companies pubic earlier than older venturecapital firms in order to establish a reputation and successfully raise capital for new funds. Evidence from a sample of 433 IPOs suggests that companies backed by young venturecapital firms are younger and more underpriced at their IPO than those of established venturecapital firms. Moreover, young venturecapital firms have been on the board of directors a shorter period of time at the IPO, hold smaller equity stakes, and time the IPO to precede or coincide with raising money for follow-on funds.},
filename={Gompers (1996) - Grandstanding In The Venture Capital Industry.pdf}
}
@article{lee2004grandstanding,
title={Grandstanding, certification and the underpricing of venture capital backed IPOs},
author={Lee, P.M. and Wahal, S.},
journal={Journal of Financial Economics},
volume={73},
number={2},
pages={375--407},
year={2004},
publisher={Elsevier},
abstract={We examine the role of venturecapital backing in the underpricing of IPOs. Controlling for endogeneity in the receipt of venture funding, we find that venturecapital backed IPOs experience larger first-day returns than comparable non-venture backed IPOs. Between 1980 and 2000, the average return difference ranges from 5.01 percentage points to 10.32 percentage points. This return difference is particularly pronounced in the “bubble” period of 1999–2000. Consistent with the grandstanding hypothesis proposed by Gompers (J. Financial Econ. 42 (1996) 133), we find that higher underpricing leads to larger future flows of capital into venturecapital funds, particularly after 1996. Cross-sectionally, the effect of underpricing is attenuated for younger venturecapital firms and those that have previously conducted fewer IPOs.},
filename={Lee Wahal (2004) - Grandstanding Certification And The Underpricing Of Venture Capital Backed Ipos.pdf}
}
General Underpricing
@article{allen1989signalling,
title={Signalling by Underpricing in the IPO Market},
author={Allen, F. and Faulhaber, G.R.},
journal={Journal of financial Economics},
volume={23},
number={2},
pages={303--323},
year={1989},
publisher={Elsevier},
abstract={None Available Online},
filename={Allen Faulhaber (1989) - Signalling By Underpricing In The Ipo Market.pdf}
}
@article{booth1996ownership,
title={Ownership dispersion, costly information, and IPO underpricing},
author={Booth, J.R. and Chua, L.},
journal={Journal of Financial Economics},
volume={41},
number={2},
pages={291--310},
year={1996},
publisher={Elsevier},
abstract={We develop an explanation for IPO underpricing in which the issuer's demand for ownership dispersion creates an incentive to underprice. Promoting oversubscription allows broad initial ownership, which in turn increases secondary-market liquidity. Increased liquidity reduces the required return to investors. Broad initial ownership, however, requires an increase in investor-borne information costs. These information costs are offset through initial underpricing. Empirical results are consistent with initial underpricing reflecting the level of ownership dispersion.},
filename={Booth Chua (1996) - Ownership Dispersion Costly Information And Ipo Underpricing.pdf}
}
@article{cooney2006partial,
title={The Partial Adjustment Effect and the Underpricing of Private Firms},
author={Cooney Jr, J.W. and Moeller, T. and Stegemoller, M.},
year={2006},
abstract={We examine valuation revisions of private targets with a unique sample of acquisitions of withdrawn IPOs. Targets that experience positive valuation changes between their IPO filing and subsequent acquisition are associated with higher acquirer announcement returns. This initially surprising relation parallels the partial adjustment effect observed in IPOs. Our results are consistent with the two prevailing explanations for the partial adjustment effect: compensation to purchasers for the provision of favorable information and behavioral biases in negotiation outcomes that are commonly known as prospect theory.},
filename={CooneyJr Moeller Stegemoller (2006) - The Partial Adjustment Effect And The Underpricing Of Private Firms.pdf}
}
@article{datar2001earnouts,
title={Earnouts: The effects of adverse selection and agency costs on acquisition techniques},
author={Datar, S. and Frankel, R. and Wolfson, M.},
journal={Journal of Law, Economics, and Organization},
volume={17},
number={1},
pages={201--238},
year={2001},
publisher={Oxford Univ Press},
abstract={We examine the effects of adverse selection and agency costs on the structure of the consideration offered in an acquisition. Specifically we investigate factors affecting the benefits arising from use of earnouts. We find that when targets have greater private information, consideration is more likely to be based on the future performance of the target. We also find an earnout is more likely to be used in an acquisition if the target is a smaller, private company in a different industry than the acquirer. In addition, earnouts are more likely to be used when fewer acquisitions take place within an industry and when targets are service companies or companies with more unrecorded assets. Finally, we compare the use of earnouts with the use of stock and find that financing considerations are a more important factor in the use of stock. },
filename={Datar Frankel Wolfson (2001) - Earnouts.pdf}
}
@article{smart2003control,
title={Control as a motivation for underpricing: a comparison of dual and single-class IPOs},
author={Smart, S.B. and Zutter, C.J.},
journal={Journal of Financial Economics},
volume={69},
number={1},
pages={85--110},
year={2003},
publisher={Elsevier},
abstract={We find that dual-class firms experience less underpricing than single-class firms and explore several hypotheses which explain this phenomenon. Compared to single-class firms, dual-class companies have slightly higher post-IPO institutional ownership and experience fewer control events. Although dual-class firms achieve a lower underpricing cost, they trade at lower prices relative to earnings and sales than single-class IPOs. This pricing differential, combined with evidence that dual-class managers earn higher compensation and that dual-class shares are common among media and entertainment industry IPOs, suggests that dual-class ownership structures protect private control benefits.},
filename={Smart Zutter (2003) - Control As A Motivation For Underpricing.pdf}
}
Short/Long Run Performance
VC Backed
@article{krishnan2011venture,
title={Venture capital reputation, post-IPO performance, and corporate governance},
author={Krishnan, CNV and Ivanov, V.I. and Masulis, R.W. and Singh, A.K.},
journal={Journal of Financial and Quantitative Analysis},
volume={46},
number={5},
pages={1295},
year={2011},
publisher={Cambridge Univ Press},
abstract={We examine the association of a venture capital (VC) firm’s reputation with the post-initial public offering (IPO) long-run performance of its portfolio firms. We find that VC reputation, measured by the past market share of VC-backed IPOs, has significant positive associations with long-run firm performance measures. While more reputable VCs initially select better-quality firms, more reputable VCs continue to be associated with superior long-run performance, even after controlling for VC selectivity. We find that more reputable VCs exhibit more active post-IPO involvement in the corporate governance of their portfolio firms, and this continued VC involvement positively influences post-IPO firm performance.},
filename={Krishnan Ivanov Masulis Singh (2011) - Venture Capital Reputation Post Ipo Performance And Corporate Governance.pdf}
}
@article{nahata2008venture,
title={Venture capital reputation and investment performance},
author={Nahata, R.},
journal={Journal of Financial Economics},
volume={90},
number={2},
pages={127--151},
year={2008},
publisher={Elsevier},
abstract={I propose a new measure of venturecapital (VC) firm reputation and analyze its performance implications on private companies. Controlling for portfolio company quality and other VC-specific factors including experience, connectedness, syndication, industry competition, exit conditions, and investment environment, I find companies backed by more reputable VCs by initial public offering (IPO) capitalization share (based on cumulative market capitalization of IPOs backed by the VC), are more likely to exit successfully, access public markets faster, and have higher asset productivity at IPOs. Further tests suggest VCs’ IPO Capitalization share effectively captures both VC screening and monitoring expertise. My findings have financial implications for limited partners and entrepreneurs regarding their VC-sorting activities.},
filename={Nahata (2008) - Venture Capital Reputation And Investment Performance.pdf}
}
@article{bradley2001venture,
title={Venture capital and IPO lockup expiration: An empirical analysis},
author={Bradley, D.J. and Jordan, B.D. and Yi, H.C. and Roten, I.C.},
journal={Journal of Financial Research},
volume={24},
number={4},
pages={465--494},
year={2001},
publisher={ARIZONA STATE UNIVERSITY},
abstract={Most initial public offerings (IPOs) feature so-called “lockup” agreements, which bar insiders from selling the stock for a set period following the IPO, usually 180 days. We examine stock price behavior in the period surrounding lockup expiration for a sample of 2,529 firms over 1988 to 1997. We find that lockup expirations are, on average, associated with significant, negative abnormal returns, but the losses are concentrated in firms with venture capital (VC) backing. For the VC-backed group, the largest losses occur for “high-tech” firms and firms with the greatest post-IPO stock price increases, the largest relative trading volume in the period surrounding expiration, and the highest quality underwriters.},
Bradley Jordan Yi Roten (2001) - Venture Capital And Ipo Lockup Expiration An Empirical Analysis.pdffilename={Bradley Jordan Yi Roten (2001) - Venture Capital And Ipo Lockup Expiration An Empirical Analysis.pdf}
}
@techreport{ivanov2008does,
title={Does Venture Capital Reputation Matter? Evidence from Successful IPOs},
author={Ivanov, V.I. and Krishnan, CNV and Masulis, R.W. and Singh, A.K.},
year={2008},
institution={Citeseer},
abstract={Venture capitalist (VC) reputation is a valuable trait, which yields important competitive benefits. Yet a generally accepted measure is lacking. To address this need, we investigate the relation of alternative VC reputation measures to especially successful venture investments, namely IPOs and post-IPO long-run firm performance. Post-IPO firm performance is measured by three well known standards: industry-adjusted operating performance, marketto- book ratio, and long-run listing survival. We find that a VC’s market share of VC-backed IPOs has the strongest and most consistent positive association with these post-IPO long-run performance metrics and with the frequency with which a VC’s portfolio firms subsequently successfully go public. We also explore the relation between VC reputation and private equity networks, IPO demand, post-IPO VC involvement and corporate governance. We find that more reputable VCs excel on all these dimensions, which helps explain why firms backed by more reputable VCs have greater IPO success and better post-IPO performance.},
filename={Ivanov Krishnan Masulis Singh (2008) - Does Venture Capital Reputation Matter Evidence From Successful Ipos.pdf}
}
Non-VC Backed
@article{kutsuna2000short,
title={The short-run performance of JASDAQ companies and venture capital involvement before and after flotation},
author={Kutsuna, K. and Cowling, M. and Westhead, P.},
journal={Venture Capital: An International Journal of Entrepreneurial Finance},
volume={2},
number={1},
pages={1--25},
year={2000},
publisher={Taylor \& Francis},
abstract={This study revealed that the level of venture capitalist involvement in the pre-flotation as well as the post-flotation period influenced the short-run performance of JASDAQ companies in Japan. We detected that JASDAQ companies differed in several ways from NASDAQ and EASDAQ companies. JASDAQ companies tended to be larger in size. Moreover, JASDAQ companies were older than NASDAQ or EASDAQ companies when they selected an initial public offering (IPO). In part, the IPO decision was influenced by the subsequent desire of owners to realize capital gains and exit via personal share sales. Further, we found that JASDAQ companies with high levels of venture capital investment reported inferior short-run performance with regard to share value.},
filename={Kutsuna Cowling Westhead (2000) - The Short Run Performance Of Jasdaq Companies And Venture Capital Involvement Before And After Flotation.pdf}
}
VC Exits
@article{cumming2003cross,
title={A cross-country comparison of full and partial venture capital exits},
author={Cumming, D.J. and MacIntosh, J.G.},
journal={Journal of Banking \& Finance},
volume={27},
number={3},
pages={511--548},
year={2003},
publisher={Elsevier},
abstract={This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an initial public offerings (IPO) involves a sale of all of the venture capitalist’s holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist’s holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a buyback exit (in which the entrepreneur buys out the venture capitalist) or a secondary sale, a partial exit entails a sale of only part of the venture capitalist’s holdings. A partial write-off involves a write down of the investment. We consider the determinants of full and partial venturecapital exits for all five exit vehicles. We also perform a number of comparative empirical tests on samples of full and partial exits derived from a survey of Canadian and US venturecapital firms. The data offer support to the central hypothesis of the paper: that the greater the degree of information asymmetry between the selling VC and the buyer, the greater the likelihood of a partial exit to signal quality. The data also indicate differences between the US and Canadian venturecapital industries, and highlight the impact of legal and institutional factors on exits across countries.},
filename={Cumming MacIntosh (2003) - A Cross Country Comparison Of Full And Partial Venture Capital Exits.pdf}
}
@article{cochrane2005risk,
title={The risk and return of venture capital},
author={Cochrane, J.H.},
journal={Journal of financial economics},
volume={75},
number={1},
pages={3--52},
year={2005},
publisher={Elsevier},
abstract={This paper measures the mean, standard deviation, alpha, and beta of venturecapital investments, using a maximum likelihood estimate that corrects for selection bias. The bias-corrected estimation neatly accounts for log returns. It reduces the estimate of the mean log return from 108% to 15%, and of the log market model intercept from 92% to -7%. The selection bias correction also dramatically attenuates high arithmetic average returns: it reduces the mean arithmetic return from 698% to 59%, and it reduces the arithmetic alpha from 462% to 32%. I confirm the robustness of the estimates in a variety of ways. I also find that the smallest Nasdaq stocks have similar large means, volatilities, and arithmetic alphas in this time period, confirming that the remaining puzzles are not special to venturecapital.},
filename={Cochrane (2005) - The Risk And Return Of Venture Capital.pdf}
}
@article{cumming2002extent,
title={The extent of venture capital exits: evidence from Canada and the United States},
author={Cumming, D. and Macintosh, J.},
journal={Venture Capital Contracting And The Valuation Of High Technology Firms, LDR Renneboog and J. McCahery, eds., Chapter 15, Oxford University Press, 2004, U Toronto, Legal Studies Research Paper No. 01-03},
year={2002},
abstract={This paper considers the issue of when venture capitalists (VCs) make a partial, as opposed to a full exit, for the full range of exit vehicles. A full exit for an IPO involves a sale of all of the venture capitalist's holdings within one year of the IPO; a partial exit involves sale of only part of the venture capitalist's holdings within that period. A full acquisition exit involves the sale of the entire firm for cash; in a partial acquisition exit, the venture capitalist receives (often illiquid) shares in the acquiror firm instead of cash. In the case of a secondary sale or a buyback exit (in which the entrepreneur buys out the venture capitalist), a partial exit entails a sale of only part of the venture capitalist's holdings. A partial write-off involves a write down of the investment. We perform empirical tests on samples of full and partial exits derived from a survey of Canadian and U.S. venture capital firms. The evidence indicates that partial exits are more likely for IPOs and secondary sales in Canada. Partial exits in Canada are also more likely the greater the market to book value of the investment. Partial exits in the U.S., by contrast, are more likely for buyback exits and when there is greater capital available for investment in the venture capital industry. The U.S. evidence further indicates that partial acquisition exits are more likely for technology firms, the longer the investment duration, and the greater the market to book value of the entrepreneurial firm. We also present evidence that the longer the investment duration, the more likely that venture capital investments will be written down, rather than completely written off. The differences we find between the Canadian and U.S. samples highlight the impact of legal and institutional factors on exit strategies. },
filename={Cumming Macintosh (2002) - The Extent Of Venture Capital Exits.pdf}
}
Theory
VC Securities
@article{hellmann2006ipos,
title={IPOs, acquisitions, and the use of convertible securities in venture capital},
author={Hellmann, T.},
journal={Journal of Financial Economics},
volume={81},
number={3},
pages={649--679},
year={2006},
publisher={Elsevier},
abstract={This paper provides a new explanation for the use of convertible securities in venture capital. A key property of convertible preferred equity is that it allocates different cash flow rights, depending on whether exit occurs by acquisition or IPO. The paper builds a model with double moral hazard, where both the entrepreneur and the venture capitalist provide value-adding effort. The optimal contract gives the venture capitalist more cash flow rights in acquisitions than IPOs. This explains the use of convertible preferred equity, including automatic conversion at IPO. Contingent control rights are also important for achieving efficient exit decisions.},
filename={Hellmann (2006) - Ipos Acquisitions And The Use Of Convertible Securities In Venture Capital.pdf}
}
@article{cumming2008preplanned,
title={Preplanned exit strategies in venture capital},
author={Cumming, D. and others},
journal={European Economic Review},
volume={52},
number={7},
pages={1209--1241},
year={2008},
publisher={Elsevier},
abstract={This paper empirically considers the role of preplanned exits (the investor's initial strategy to sell the investee firm via an acquisition or an initial public offering (IPO) at the time of initial contract with the entrepreneur), legal conditions and investor versus investee bargaining power in the allocation of cash flow and control rights in entrepreneurial finance. We introduce a sample of 223 entrepreneurial investee firms financed by 35 venturecapital funds in 11 continental European countries, and these data indicate the following. First, preplanned acquisition exits are associated with stronger investor veto and control rights, a greater probability that convertible securities will be used, and a lower probability that common equity will be used; the converse is observed for preplanned IPOs. Second, investors take fewer control and veto rights and use common equity in countries of German legal origin, relative to Socialist, Scandinavian, and French legal origin. Third, more experienced entrepreneurs are more likely to get financed with common equity and less likely to be financed with convertible preferred equity, while more experienced investors are more likely to use convertible preferred equity and less likely to use common equity.},
filename={Cumming others (2008) - Preplanned Exit Strategies In Venture Capital.pdf}
}
@article{jensen1986agency,
title={Agency costs of free cash flow, corporate finance, and takeovers},
author={Jensen, M.C.},
journal={The American Economic Review},
volume={76},
number={2},
pages={323--329},
year={1986},
publisher={JSTOR},
abstract={Corporate managers are the agents of shareholders, a relationship fraught with conflicting interests. Agency theory, the analysis of such conflicts, is now a major part of the economics literature. The payout of cash to shareholders creates major conflicts that have received little attention.' Payouts to shareholders reduce the resources under managers' control, thereby reducing managers' power, and making it more likely they will incur the monitoring of the capital markets which occurs when the firm must obtain new capital (see M. Rozeff, 1982; F. H. Easterbrook, 1984). Financing projects internally avoids this monitoring and the possibility the funds will be unavailable or available only at high explicit prices...},
filename={Jensen (1986) - Agency Costs Of Free Cash Flow Corporate Finance And Takeovers.pdf}
}
Unknown (But apparently important)
@article{gonenc2012role,
title={The Role Of Private Equity In Private Acquisitions},
author={Gonenc, H. and Leisink, K.},
journal={The Oxford Handbook of Private Equity},
pages={469},
year={2012},
publisher={OUP USA},
abstract={NOT AVAILABLE},
filename={Gonenc Leisink (2012) - The Role Of Private Equity In Private Acquisitions.pdf}
}
