Venture Capitalist Certification in Initial Public Offerings




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    • The University of Georgia, Department of Banking and Finance, School of Business Administration, Athens; and The University of Michigan, School of Business Administration, Ann Arbor; respectively. We are grateful to Mike Barclay, David Blackwell, Michael Bradley, Susan Chaplinsky, Harry DeAngelo, Cliff Holderness (discussant), E. Han Kim, Laura Kodres, Ron Masulis, Jeff Netter, Annette Poulsen, Bill Sahlman, H. Nejat Seyhun, Dennis Sheehan, and seminar participants at Harvard University, the University of Oregon, and Purdue University for their comments and recommendations. We also acknowledge the data collection assistance provided by Rick Mull, Eric Van Houwelingen, and So Han Lee. Financial support for this project was provided by the Center for Entrepreneurial Studies at New York University, the University of Michigan Summer Research Program, and the University of Georgia Research Foundation.


This paper provides support for the certification role of venture capitalists in initial public offerings. Consistent with the certification hypothesis, a comparison of venture capital backed IPOs with a control sample of nonventure capital backed IPOs from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads. In effect, the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm. In addition, we document that venture capitalists retain a significant portion of their holdings in the firm after the IPO.