VC Board Representation and Performance of US IPOs

Authors

  • Salim Chahine,

    1. The authors are respetively, Associate Professor of Finance, The Suliman Olayan School of Business, American University of Beirut; and Professor of Finance, Cardiff Business School, Cardiff University. They are grateful for helpful comments and suggestions from the seminar participants at the University of Essex, the participants of the Eastern Finance Association 2010 meeting, and the Entrepreneurial Finance and Venture Capital Symposium at the European Financial Management Association 2010 meeting. They are also thankful for valuable comments from the participants at the 2010 JBFA Capital Markets Conference at the University of North Carolina. The author would also like to thank the editors, an anonymous referee and an anonymous conference delegate for their detailed feedback on previous versions of this paper. Salim Chahine would like to acknowledge the financial support provided by the University Research Board at the American University of Beirut.
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  • Marc Goergen

    Corresponding author
    1. The authors are respetively, Associate Professor of Finance, The Suliman Olayan School of Business, American University of Beirut; and Professor of Finance, Cardiff Business School, Cardiff University. They are grateful for helpful comments and suggestions from the seminar participants at the University of Essex, the participants of the Eastern Finance Association 2010 meeting, and the Entrepreneurial Finance and Venture Capital Symposium at the European Financial Management Association 2010 meeting. They are also thankful for valuable comments from the participants at the 2010 JBFA Capital Markets Conference at the University of North Carolina. The author would also like to thank the editors, an anonymous referee and an anonymous conference delegate for their detailed feedback on previous versions of this paper. Salim Chahine would like to acknowledge the financial support provided by the University Research Board at the American University of Beirut.
      Address for correspondence: Salim Chahine, Associate Professor of Finance, The Suliman Olayan School of Business, American University of Beirut, Bliss Street, Po Box 11-0236, Beirut, Lebanon. e-mail: salim.chahine@aub.edu.lb
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Address for correspondence: Salim Chahine, Associate Professor of Finance, The Suliman Olayan School of Business, American University of Beirut, Bliss Street, Po Box 11-0236, Beirut, Lebanon. e-mail: salim.chahine@aub.edu.lb

Abstract

Abstract:  This paper studies the impact of five dimensions of venture capitalist (VC) power on the likelihood of the board representation of VCs in their portfolio firms at the initial public offering (IPO) as well as the effect of the latter on IPO performance. The dimensions of VC power are based on Finkelstein's (1992) four dimensions of power which are ownership power, structural power (i.e., the VC's rank within the firm's financial hierarchy), expert power (i.e., VC industry specialization), and prestige power (i.e., the number of IPOs the VC has been involved with so far). We add controlling power (i.e., how pivotal the VC is to the voted decision) to these four dimensions. We find that all five dimensions of power have a significantly positive impact on the likelihood of VC board membership. While controlling for the possible endogeneity of the latter, underpricing and the IPO premium are higher if there is VC board membership, which is consistent with both the grandstanding and management support hypotheses. Our results suggest that VCs improve IPO performance and that they do not just maintain a strong presence in better performing companies after the IPO.

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