The effect of venture capital reputation on the long-run stock and operating performance of IPO firms

Authors: Jeng-Ren Chiou; Ting-Kai Chou; Yu-Ju Chen;

Journal: Chia Da Management Review. Jun. 2007, 27(1): 115-167.

Keywords: VC Reputation; IPO Firms; Stock Return; Operating Performance

Abstract:
The objective of this study is to investigate the impact of venture capital (hereafter, VC) reputation on the operating and stock performance of firms going public. We refer to concepts of the underwriter reputation and audit or industry specialists to develop a composite score of VC reputation. Six measures used to compute VC reputation scores include the number and market value market share of a venture capitalist in the IPO market, shareholdings, percentage of board members, age, and funds-under-management of VC. We differentiate VC firms into high and low reputation brackets based on a composite score each year. Our sample of IPOs spans a period 7 years from 1995-2001. The results show that VC backed firms have superior stock return relative to non-VC capital backed firms in the two years following listing. Moreover, we find higher reputation VC firms are associated with significantly superior long-run operating and market performance. Overall, we construct a composite measure for VC reputation, and confirm the differences in reputation and monitoring skills and efforts between various VCs. The results may provide further insight into the topic.