The Role of Venture Capital Funding on IPO Underpricing: A Study on U.S. IPOs Between 1985 and 2020

Sammanfattning: IPO underpricing is a historical phenomenon that has cost entrepreneurs billions of dollars as their companies are undervalued on average when taken public. This paper primarily serves to provide an in-depth analysis on the effect that venture capital- funding has on IPO underpricing when also controlling for VC-firms' bias towards high-tech industries. Secondly, we give a contemporary perspective on the phenomenon by including observations from 2006 to 2020. We show that the framework our methodology is based on exhibits multicollinearity in its original form, and that its unadjusted venture capital-variable likely absorbs the effect of firms being in high-tech industries as a result of the large overlap among their observations. The unadjusted VC- variable is also shown to provide no explanatory power to the model in large. Our constructed non-tech VC-variable indicates, although insignificantly, that venture- capital funding contributes to less underpricing, while the unadjusted VC-variable shows the opposite. This implies that companies and their founders should not assume that venture capital funding damages future IPO prospects by inducing underpricing. Finally, a general increase in IPO underpricing and volatility is observed between 2006 and 2020, while their respective correlations with firm-specific characteristics and own past values have decreased. This suggests that other, unexplored factors have become relatively more important in IPO underpricing in recent years.