Top VC IPO Underpricing

41 Pages Posted: 3 Feb 2015

See all articles by Daniel Bradley

Daniel Bradley

University of South Florida

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Laurie Krigman

Babson College

Date Written: January 3, 2015

Abstract

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

Bradley, Daniel and Kim, Incheol and Krigman, Laurie, Top VC IPO Underpricing (January 3, 2015). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2559875

Daniel Bradley

University of South Florida ( email )

Tampa, FL 33620
United States

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Laurie Krigman (Contact Author)

Babson College ( email )

Finance Division
321 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4246 (Phone)

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