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  4. The Endorsement Effects of Corporate Venture Capital in the Creation of Public Companies
 
working paper

The Endorsement Effects of Corporate Venture Capital in the Creation of Public Companies

Ginsberg, Ari
•
Hasan, Iftekhar
•
Tucci, Christopher L.  
2005

Empirical research on the certification role of venture capital investment in initial public offerings (IPOs) tends to ignore how variant attributes and contexts might affect the benefits of affiliation received by a young firm undergoing an IPO. In this paper we argue that because corporate venture capital (CVC) and independent venture capital (IVC) investors possess different types of expertise and investment orientations, they provide different confidence-building signals to investors of newly public firms. Analysis of 1830 initial public offerings during 1990-1999 showed that CVC investment sends a different signal of quality than IVC investment, as reflected in the extent to which the offer price is lower than the market price at the end of the first day of trading than it would be with IVC investment alone. This effect is particularly pronounced when the corporate investor is a bank, or in the same industry as the IPO, and when equity markets are hot. We also found that this effect decreases at an escalating rate when the corporate investor’s portfolio becomes larger. Our results confirm the premise that corporations, banks and independent venture capitalists play different endorsement roles in the creation of public companies, and that the value of CVC endorsements depends on key attributes of the CVC and the type of market uncertainty that dominates IPO investors’ concerns.

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