Underpricing of Venture and Non Venture Capital Ipos: An Empirical Investigation

36 Pages Posted: 11 Nov 2008

See all articles by Bill B. Francis

Bill B. Francis

University of South Florida - College of Business Administration

Date Written: 1999

Abstract

In this paper we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non venture-backed initial public offerings (IPOs) using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and are generally associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial day returns of venture-backed IPOs are, on average, higher than the non venture-backed group. We also observe a significantly higher degree of pre-market pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket. We also observe that for both venture and non-venture issuers, there is a positive relationship between deliberate underpricing and the probability that underwriters provide support for the issue. This evidence is consistent with the notion that underwriters deliberately underprice the offering to reduce costs of price stabilization in the after-market.

Suggested Citation

Francis, Bill B., Underpricing of Venture and Non Venture Capital Ipos: An Empirical Investigation (1999). NYU Working Paper No. FIN-99-065, Available at SSRN: https://ssrn.com/abstract=1298793

Bill B. Francis (Contact Author)

University of South Florida - College of Business Administration ( email )

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United States
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