Venture-backed Company Ipo Underpricing: The "certification" Theory And Signaling Theory

The underpricing of vc-backed IPO has been the issue of many research papers during the years.Underpricing is indicated by initial returns,i.e.,the first trading day close or bid price minus the offer price divided by the offer price.The main focus is around the difference in underpricing level between vc-backed IPO and non vc-backed IPO.There are two main theorys explaining the difference:Certification theory and Grandstanding theory.Megginson and Weiss found that the underpricing of vc-backed firms was lower than that of non vc-backed firms,according to the data of American listed firm. They noticed the function of underwriters in IPO market and brought forward the theory that venture capital might establish some certification in the IPO processes of their investing firms.Therefore,the existence of venture capital companies as shareholders on board might reduce the information asymmetry and result in a reduction of the underpricing.However,Gompers found that young vc-backed firm experienced higher underpricing during IPO than old vc-backed firm,which might be due to the pressure of young venture capital firms to raise new fund in the future.Young venture capital firms were eager to establish a reputation,thus taking companies public earlier.These"grandstanding"behave caused higher underpricing cost to the young venture capital.This paper finds evidence of significantly higher underpricing and direct offering cost for VC backed IPOs than for non-VC backed firms,holding offering size, underwriter quality,and firm age constant,using the data of Chinese listed firms.The result validates the Grandstanding theory,but could not negate the function of Certification theory in China capital market.