Top VC IPO Underpricing
41 Pages Posted: 3 Feb 2015
Date Written: January 3, 2015
Before the IPO bubble burst, the first day return for IPOs backed by top VCs firms was double that of non-top VCs IPOs. Top VC IPOs were also twice as likely to receive all-star analyst coverage and suffered twice as large negative returns upon lockup expiration. We argue that this was not a coincidence. Underwriters benefited from underpricing vis-à-vis allocation strategies whereas VCs gain from information momentum which allows them to cash-out at higher prices at lockup expiration. All-stars are a scarce resource underwriters allocate to their best clients (Top VCs) who bring them repeat business. Post-bubble, regulatory shocks restricted preferential IPO allocations and reduced the value of all-star coverage. Consequently, these relations disappeared indicating that regulatory changes likely had the desired effect.
Keywords: Initial public offering; all-star analyst coverage; venture capital; underpricing
JEL Classification: G14; G24
Suggested Citation: Suggested Citation