Venture capital firm network and initial public offering characteristics

Abstract

I explore three ways in which VC firms' network affects the IPO characteristics of their portfolio companies. First, adding more values to their portfolio companies, the better-connected VC firms can make their portfolio companies perform better after IPO. Secondly, the better-connected VC firms have stronger bargaining power, leading to more stringent disciplining on their portfolio companies. Thirdly, the better-connected VC firms have more channels to disseminate the information of its portfolio companies to the public market. First, I find that IPO companies invested by more central VC firms have higher rate of return on assets (ROA) and spend more R&D in the post-IPO years. Second, companies invested by more central VC firms have lower levels of earnings management in the several years prior to their IPO. Third, companies invested by more central VC firms are associated with larger absolute values of offer price revisions. Fourth, companies invested by more central VC firms have greater IPO market valuation, which are reflected in the higher Tobin's q. Fifth, companies invested by more central VC firms induce greater interest on some important financial market players. Such companies will be followed by more sell-side analysts and higher percent of their shares will be hold by institutional investors. Lastly, the stocks of IPO companies invested by more central VC firms enjoy higher market turnover and better one year post-IPO performance. Overall, my results are consistent with the notion that more central VC firms are able to provide more value-adding service to their portfolio companies, to improve the corporate governance of their portfolio companies, and to draw greater market attention to their portfolio companies.