Venture Capital Distributions: Short-Run and Long-Run Reactions

Authors

  • Paul Gompers,

    1. Harvard Business School and NBER
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  • Josh Lerner

    1. Harvard Business School and NBER
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    • Both authors are at the Harvard Business School and NBER. We thank Tim Bliamptis, T. Bondurant French, Robert Moreland, Tom Philips, and several organizations—Brinson Partners and its various affiliate limited partnerships, Kemper Securities, RogersCasey Alternative Investments, the US West Investment Trust, and a major corporate pension fund—for providing us with distribution data and limited partnership agreements. Additional data were provided by Rick Carter, Harold Mulherin, and Jesse Reyes. We also thank Jonathan Axelrad, Jeff Coles, Joetta Forsyth, Kathleen Hanley, Steve Kaplan, Robin Painter, Raghu Rajan, Jay Ritter, Bill Sahlman, Jeremy Stein, René Stulz, Katherine Todd, an anonymous referee, and seminar participants at the American Finance Association meetings, Arizona State University, Boston College, the Center for Research in Security Prices biannual conference, Dartmouth College, Harvard University, Hebrew University, the NBER Corporate Finance Group, Tel-Aviv University, and the Universities of Arizona, British Columbia, Chicago, Michigan, North Carolina, and Virginia for their comments. Leo Huang and Bac Nguyen, and especially Taras Klymchuk and Alon Brav, provided excellent research assistance. We acknowledge the support of the Center for Research in Security Prices and the Harvard Business School Division of Research. All errors are our own.

Abstract

Venture capital distributions, a legal form of insider trading, provides an ideal arena for examining the share price impact of transactions by informed parties. These sales, which occur after substantial run-ups in share value, generate a substantial price reaction immediately around the event. In the months after distribution, returns apparently continue to be negative. When the short- and long-run reactions are decomposed, they are consistent with the view that venture capitalists use inside information to time stock distributions: Distributions of firms brought public by lower quality underwriters and of less seasoned firms have more negative price reactions.

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