A Study On The Relationship Between The Reputation Of Venture Capital And Chinext IPO Underpricing

The initial public offering (IPO) underpricing is one of the three hot topics of IPO research areas. IPO underpricing is relatively higher in China’s stock market than in Western mature markets. Researchers have conducted deep discussions on this issue, based on the particularity of the China’s stock issuance system. As being active in the capital markets, venture capital backed IPOs are getting more and more attentions.There are mainly two hypotheses to explain venture capital backed IPO underpricing:"certification supervision hypothesis" thinks that venture capital helps eliminate information asymmetry in the issuance process, so that IPO underpricing is lower while "reputation effect hypothesis" thinks that venture capital institutions will promote premature companies getting listed thus IPO underpricing will be higher. The study found that both situations may occur, depending on the stage of development of venture capital and institutional background.We choose355companies listed on Chinext until the end of2012and mainly analyze three aspects:(1) the influence of venture capital’s reputation on IPO underpricing;(2) the different role of venture capital in listing process, based on earnings managements and issuance lags;(3) the difference of investment characteristics of venture capital and how these characteristics influence IPO underpricing.Our study found that high reputation venture capital backed IPO underpricing is lower while low reputation venture capital and direct brokerage investment backed IPO underpricing is higher. Low reputation venture capitals play a significant role in earnings management. And direct brokerage investment institutions are important in rent-seeking process. Further research found that, the longer the practice time of venture capital and the investment period, the lower the IPO underpricing will be. At the same time high reputation venture capital commonly has longer practice time and is inclined to enter the enterprise earlier.This study found different reputational venture capital plays different roles in the listing process because of the relative immaturity of the venture capital industry and widespread rent-seeking behavior in the listing process. Based on these considerations, we propose advice for the development of the venture capital industry and the perfection of IPO listing system.The main contributions of this paper are listed as follows:(1) We select all355companies listed on Chinext as the research samples, which means more complete data than similar studies;(2) This article treats direct brokerage investment as a separate class, expanding the research on venture capital’s impact on IPO underpricing by the analysis of rent-seeking behavior in the listing process;(3) We study the internal mechanism of venture-backed IPO underpricing, deepening the research on the impact of venture capital’s characteristics on IPO underpricing.