Venture capitalist/equity alliance ownership participation in pre-IPO firms: Determinants and effects
Description
Ownership structure has been recognized as an important topic in corporate finance because of the influential relationship between firm managers and shareholders (agency theory). This relationship has an effect on the decision-making process in the firm, which has an impact on firm characteristics such as firm value. Because going public leads to changes in stock ownership structure, which could affect the firm's value and future performance, pre-IPO private firms provide a good case study of ownership structure This study has two objectives. The first is to initiate an inquiry into which firm characteristics are associated with management ownership and the participation of external institutions and corporations---specifically venture capitalists (VCs) and equity alliances (EAs)---in the ownership structure of pre-IPO private firms. My second objective is to examine the impact of ownership structure on the key IPO variables: underpricing, offer price, offer size, revision, turnover, and underwriter reputation The determinants of VC ownership participation, given the pre-IPO firm's characteristics, can be summarized as follows. VC-baked firms tend to be younger, smaller, and high-growth firms. They characteristically have negative earnings and low profitability, low levels of debt, and higher current ratios. VC- and EA-backed firms are similar in age, level of sales, level of debt, profitability, and R&D and S&M expenses. However, the results for EA are less strong than for VC-backed firms, indicating that the profile of firms that receive VC investments is more defined than that in firms that receive EA backing Finally, VC and EA investments have a positive impact on the offering process. The offer size is smaller for VC- and EA-backed firms than for other IPOs. The offer price and underwriter reputation is higher for VC-backed and for EA-backed firms compared with other firms. Revision is higher for VC- and EA-backed firms, suggesting that the information disclosure during the pre-market is high for these firms. Underpricing is larger for VC- and EA-backed firms, suggesting that underpricing is due primarily to market activity