Discussion of Venture Capitalists, Business Angels, and Performance of Entrepreneurial IPOs in the UK and France

• DOI: http://doi.org/10.1111/j.1468-5957.2007.02034.x
• Date: 01 April 2007
• Author: Amir Amel‐Zadeh,Gishan Dissanaike
• Published date: 01 April 2007

Journal of Business Finance & Accounting, 34(3) & (4), 529–540, April/May 2007, 0306-686X

doi: 10.1111/j.1468-5957.2007.02034.x

Discussion of Venture Capitalists, Business

Angels, and Performance of

Entrepreneurial IPOs in the UK and

France

Gishan Dissanaike and Amir Amel-Zadeh∗

The initial underpricing of IPOs is a subject of interest to many academics and

practitioners. The fact that initial public offerings are underpriced is widely known

and documented. A plethora of empirical studies investigates the determinants of the

first day returns of IPOs in different countries and institutional settings. Numerous

explanations are proposed for the significant first day returns of public offerings.

Informational asymmetries are often cited as one of the main explanations for the

IPO underpricing puzzle. Several studies examine the role of risk capital providers in

reducing these asymmetries during IPOs and the effect of their participation on the

initial underpricing. The empirical findings are still the subject of intense debate.

Table 1 summarizes the main findings of a selection of international studies on

IPO underpricing, in which the effect of venture capital financing is examined

as part of the study. As highlighted in the table, previous empirical evidence

presents contradictory results on this phenomenon, both within and across coun-

tries. While earlier studies provide evidence of lower underpricing for firms with

venture capital backing (e.g., Megginson and Weiss, 1991), more recent evidence

suggests no significant difference in the level of underpricing for firms with and

without venture capital involvement (e.g., Brau et al., 2004). Moreover, there have

even been several studies that report higher underpricing for ventures with prior

risk capital financing (e.g., Lee and Wahal, 2004). Of the 21 studies listed in

Table 1, eight provide evidence of higher underpricing for IPOs with venture capital

backing, two studies report lower underpricing, and eleven present no significant

difference in underpricing between VC backed and non-VC backed IPOs.1The

∗The authors are from the Judge Business School, University of Cambridge. They would like to thank the

editor and anonymous referees for their useful comments.

Address for correspondence: Gishan Dissanaike, Judge Business School, University of Cambridge, Trump-

ington Street, Cambridge CB2 1AG, UK.

e-mail: g.dissanaike@jbs.cam.ac.uk

1 Interestingly, in seven of the studies the results change once additional variables are controlled for

(e.g., reputation or age of the VC firm, and affiliation to the underwriter). However, the changes do not

alter our observation that the evidence in Table 1 is contradictory.

C

2007 The Authors

Journal compilation C

2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA. 529