Are venture capital backed IPOs more underpriced than non-venture backed IPOs on the American Stock market in the period 2007-2012?

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Are venture capital backed IPOs more underpriced than

non-venture backed IPOs on the American Stock market in the period

2007-2012?

Bachelor Thesis 20-02-2014

Author: Floris Kerkhof Student number: 10017682 Supervisor: Ilko Naaborg

Faculty of Economics and Business University of Amsterdam

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1. Introduction

An initial price offering (IPO) is the first time that a company issues its equity to the general public (Ritter, 1998). There are many reasons why a company may decide to issue its shares to the public. The most common reason is that it is a relatively easy way to acquire capital. The capital gained by the IPO and the new liquidity of the shares make it easier to raise additional capital. There are also reasons for a company to stay private. IPOs are usually very costly and the entrepreneur gives away a part of his ownership and control in the company.

Under pricing is what will be researched in this paper it is a phenomenon which can be found the first time a company issues shares to the public. The stock price is issued below its actual value to ensure a positive first day return. There are many different theories in the literature that try to explain the cause of under pricing. These will be discussed in the literature review. Under pricing is interesting because the firm should prefer low under pricing and buyers want to buy the most underpriced shares. Ibbotson (1975) found that on average stocks are underpriced. The fact that most stocks are underpriced means that different forces may influence the decision to under price stocks.

Venture capital firms are groups of investors that invest in starting company and sell their share when the company goes public. That is why they are skilled in finding prospects with good growth opportunities. They sell their shares in the company at the time of the IPO. That is why they want the price of the shares to be as high as possible at this time. Literature shows that top tier underwriters lead to more interest in the IPO (Carter and Manaster, 1990). Liu and Ritter (2011) say that venture capitalists are more interested in this extra media attention for their firm, because they believe this leads to higher prices. In the literature there are different theories regarding the effect of venture capital backing on under pricing. In this paper it is predicted that venture capitalist backed IPOs are willing to have more under pricing in exchange for top tier underwriter support.

First in section 2 the different literature regarding under pricing will be discussed, mainly focusing on the impact of venture capital backing on under pricing. In section 3 the methodology and data will be discussed. A sample will be used based on the IPO data from 2007-2012. Difference will be made between venture capital and non-venture capital backed IPOs. The results of the tests done to test the hypothesis will be discussed in section 4. Based on the results that are found the conclusion will be made in section 5.

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4 The purpose of this thesis is to get a better understanding of why firms go public, the under pricing behavior of firms and the effect that venture capital backing has on under pricing. In the section 4 it will be investigated if there is higher under pricing found with venture capital backed firms and the explanation for this difference with non venture capital backed firms. With an empirical analysis the following question will be researched: Are venture capital backed IPOs more underpriced than non-venture backed IPOs on the American Stock market in the period 2007-2012?

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2. Literature Review

In this section the literature about Initial Public Offerings (IPOs), under pricing and venture capital will be reviewed. Starting with the literature regarding IPOs, after that the literature about under pricing and last the literature about venture capital.

2.1 Initial Public Offerings

An IPO is the first time that a firm issues equity of the company to the public (Ritter, 1998). This is usually done with the help of an underwriter to guide a company in the process, these are usually banks. In return for their services the underwriter charges a fee.

For growing companies that don’t have a lot of private capital it is essential that they acquire financing through external parties. These might be friends, family or by seeking venture capitalists. For regular investors investing in such a company is risky. The reason for this is that these companies haven’t existed for a long period of time. This means that there is a lot of information asymmetry between the company and potential investors. Also most of the companies’ value hasn’t been realized yet, but is part of growth opportunities. Another option to acquire capital is for a company to go public and selling stock to a large number of diversified investors (Ritter, 1998). This is a distinct advantage over loans because this means that the company doesn’t have to pay interest.

There are different reasons why a company may decide to go public. By selling shares to the public the liquidity of the current share holders increases. It also gives existing

shareholders an exit strategy. Which means a way for investors to cash in on their

investments if they choose to do this (Ritter and Welch, 2002). They found that from 1980 to 2001 the IPOs in this period raised $488 billion in gross proceeds. This averages to $78 million per deal and shows that it can be very valuable for a company. Black and Gilson (1998) found that venture capitalist use this as an exit strategy and a way for the entrepreneurs to regain control of the company. In the same way it can be a way for employees who got paid in stocks from the firm to cash in on these stocks. Also by being public the firm is more known and leads to more media attention for the firm. This might be useful for future business in the form of less money needed for marketing expenses (Brau and Fawcett, 2006). A private firm is usually owned by a venture capital firm or a small group of investors. Public firms are owned by many different investors with a small stock in the

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6 company. This means that the ownership is more dispersed and the entrepreneur has more bargaining power over the decisions in the company (Chemmanur and Fulghieri, 1999).

Brau and Fawcett (2006) find that the primary motivation for going public is to facilitate acquisitions and the main reason to stay private is to preserve the ownership and control over the decision-making in the company. That is the main reason why a firm might not go public. It leads to a separation of ownership and control. Before an IPO the owners of the company and the managers are usually the same people. Bringing in new shareholders reduces the earlier shareholders control over the company. Another reason is the high costs of going public. These include paying an underwriter and other legal expenses that have to be made. Lee et al (1996) show that the total cost of the IPO amounts to 11 percent of the proceeds.

2.2 Under pricing

A widely researched phenomenon regarding IPOs is under pricing. The average IPO is priced lower than the closing price on the first day. This means that a lot of potential gains are being neglected. The IPO could be priced at a higher price. Loughran and Ritter (2004) find that in the 1980s IPOs were underpriced 7 percent which doubled to 15 percent during the 1990s. There have been many theories trying to explain under pricing. Ibbotson (1975) was one of the first that found that IPOs are on average underpriced. He found an 11.4 % discount on the offer price which disappeared shortly after the issue. His research and most others in that time period found positive initial returns. He is unsure what the cause of the under pricing is and if the issuer or underwriter profits from this. There hasn’t been discussion in the

literature about the presence of under pricing, but a lot of research has been done on the cause of under pricing.

One of the first explanations of under pricing was presented by Baron (1982). It is based on the information asymmetry between the issuing firm and the underwriter. Baron said that the underwriter is better informed about the market and has better distribution services. The issuer wants the highest possible price for his IPO. The underwriter wants to sell the shares to get a better reputation and to make sure it doesn’t have to pay the cost of the unsold shares itself. The underwriter has more information and therefore has more influence on the pricing of the shares. This is because the issuer is very dependent on the underwriter.

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7 Thus the underwriter can price the shares below their actual value to make it easier to sell the shares. This means that bigger information asymmetry leads to higher under pricing.

Normally the presence of under pricing would lead to investors using this

information and leverage it into profit for them. This can’t be done because of the winners curse. As mentioned earlier there is an information asymmetry, some people know more about the company than others. Investors with better knowledge about the true value of the IPO should be able to profit by buying underpriced IPOs. This gives them a big advantage over investors with less information. For uninformed investors this means that the shares they can acquire are the shares that other investors didn’t want. This is the winner’s curse hypothesis; you only win when the shares are overpriced. Under pricing is therefore a reward for

investors to overcome the information bias (Rock, 1986).

Another explanation is that firms under price their IPOs to create a bandwagon effect. If a share isn’t being purchased other investors will also stay away. For this reason firms will deliberately under price their issue. After attracting the first buyers they hope this creates enough interest that other investors will also buy their issue even if they don’t have much information regarding the stock (Ritter et al., 1998).

Another theory is the signaling theory. Welch (1989) describes this as a way for a firm of better quality to signal this to investors by under pricing their IPO. They do this to ensure that investors know it is a high quality firm and gets a higher price at a seasoned offering (Welch 1989). They do this because low quality firms can make extra expenses to look like a high quality firm, but they can’t take on the extra cost of the under pricing. This way good quality firms can signal their quality to investors. Another way of signaling Ibbotson (1975) describes firms consciously take a loss on the first offering in the hope of making large profit on the second offering. The idea behind this is that after the stock got attention from investors it should be easier to sell subsequent offerings. Signaling can be used by a firm to distinguish its firm’s quality and to make its stock stand out more.

None of the theories mentioned in this part can completely explain the existence of under pricing. As seen by Ritter (2003) the under pricing has also changed over time. This leads to believe that the causes of under pricing may have also changed. The explanation of under pricing might be a combination of some of the theories, but that it exists isn’t doubted. In this paper the primarily focus won’t be on the cause of the under pricing, but on the effect that venture capital backing has on under pricing.

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2.3 Venture Capital

Venture capitalists are investors or companies that make venture investments and bring capital and expertise to their investments. Venture capital is usually provided to high risk startup companies. These are mainly companies that are making new technology and are based in high technology sectors. The investments are too high risk for banks or capital markets. Venture capitalists are experienced in finding good prospects, evaluating their progress and also supporting these companies to reach their growth potential. Venture capitalists have less information about the company they invest in than private equity investors. For this reason they should demand higher returns on their investment. They sell their shares of their owned equity in a company when the company issues stock to the public. For this reason it is beneficial for the venture capitalists that the company performs well. A lot of the literature is based around their strong ties with high quality underwriters. The effect of venture capital on under pricing is the main aspect in this research. As we have seen before there are many different theories that try to explain IPO under pricing. Here the main literature and findings of the effects of venture capital will be explained.

Megginson and Weiss (1991) find that the presence of venture capital backing leads to higher initial returns and also lower cost of going public. They also found lower under pricing for venture capital firms than non venture capital firms. They say that venture capitalists act as a certification for the firm. Certification means that by having a venture capitalist backing your firm it certifies the quality of the firm. It can be explained by the fact that venture capitalists have a lot of repeated business with their underwriters. This way they are able to attract greater quality underwriters and this gives more credibility to the issuing firm. These good underwriters lead to less information asymmetry between the firm and potential investors. This as shown earlier should lead to lower under pricing (Rock, 1986).

A different result was found by Lee and Wahal (2004). They found higher under pricing for capital venture firms. They explain this through the grandstanding theory

proposed by Gompers (1996). Venture capital firms need to bring companies public to signal their quality. Thus they are willing to take on more under pricing to build their reputation and raise more capital in the future. Carter and Manaster (1990) support the view that reputable underwriters act as a signaling tool. They also find that underwriters try to defend their ranking by choosing low risk firms. This way they have a higher chance of selling their shares at the IPO. As we saw earlier most venture capitalists repeatedly use the same underwriters

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9 (Megginson and Weiss, 1991). For this reason underwriters don’t want to take on to much risk, this way they can make sure they are perceived as of good quality.

Brav and Gompers (1997) found that venture capital backed firms outperform non venture capital backed firms on the long term. They explain this by mentioning that venture-backed firms go public with higher tier underwriters than non venture-venture-backed firms. Carter, Dark and Singh (1998) find a relation between the quality of an underwriter and the long-run performance of IPOs. So the two main theories are that under pricing is caused because of signaling or that it is a consequence of information asymmetry.

Liu and Ritter (2011) have a different view on venture capital backed IPO under pricing. They see the underwriters as oligopolists. There is only a select group of underwriters of good quality, industry expertise and that get a lot of analyst coverage from influential analysts. For this reason this group of underwriters is very influential regarding the power they have in choosing the IPOs they want to support. Because the underwriters have more bargaining powers they should be able to use this to force higher under pricing on the firms that are most in need of good underwriters. Venture capitalists usually fall under this category because they are focused on the day that shares are distributed in the company to the partners. Liu and Ritter (2011) say that this is usually between six months to 1 year after the IPO. Extra coverage leads to higher market prices. Venture capitalists have a great preference to get this extra coverage, because they are dependent on prices. Underwriters can get this extra coverage and therefore venture capitalists are very dependent on good underwriters. This is called the analyst lust theory. Venture capitalists have great lust for high quality coverage to get higher prices on their IPO. In return they are willing to submit their IPO to greater under pricing.

In the above literature we found that there are different ways that venture capital backing can affect the under pricing of a firm. In this paper the focus is on the analyst lust theory of Liu and Ritter (2011). Venture capitalists are usually backed by high quality underwriters and his should lead to higher under pricing for the IPOs. This is because of the increased bargaining power of the underwriter firms and grandstanding as mentioned by (1996). In this paper we want to find out if venture capital firms have higher under pricing. That is why the following hypotheses will be tested:

H0: Venture capital backed-IPOs don’t have a significantly different level of under pricing than non venture capital backed-IPOs in the short term

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10 H1: Venture capital backed-IPOs have a significantly higher level of under pricing than non-venture capital backed-IPOs in the short term

3. Methodology & Data

Here the model which we use will be explained and how the data is acquired and it is explained why the data is gathered this way.

3.1 Model

The hypotheses will be tested with a one-tailed T-test. The first thing that will be tested is if the under pricing that we found in our sample is significant. The following hypothesis will be used:

H0 : UPi= 0 H1 : UPi > 0

The T-test will take the form of:

(1) T = (UPi-μ)/(Si/√n)

UPi is the under pricing, μ is the median, Si is the standard deviation and n is the number of observations.

The amount of under pricing can be found by using this formula (2) UPi = (CPi-OPi)/OPi

UPi is the under pricing of a firm’s stock. OPi is the offering price of a firm’s IPO. CPi is the closing pricing of a firm’s stock at the end of the day.

To find the differences between venture capital and non venture capital-backed firms the following hypotheses will be used.

H0: capital venture – non capital venture = 0 H1: capital venture – non capital venture > 0

Here the under pricing of the capital venture and non capital venture firms will be subtracted and be put in place of the UPi in the formula above. The Welch T-test of formula 3 will be used here, because of the difference in sample size and variances.

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11 (3)

The significance level ( 95% or 99%) will be dependent on the size of the sample.

3.2 Data

There will be used a similar research setup as used in the Liu and Ritter (2011) paper. Only the focus won’t be on the effect of all star analysts, but only on the effect that venture capital on the under pricing of IPOs. We will use data from the period 2007-2012. The reason for this is the Liu and Ritter (2011) paper focused on the 1993-2008 period and this way the newest available data will be used to find out the validity of our hypothesis. 2007 is also included because then we also have data from before the crisis in our sample. The geography that will be used is the United States. This is the same as in the rest of the literature that the sample is focused on the United States stock market. Furthermore only stocks that start with an opening price above 5 dollar are chosen, this is also done in Liu and Ritter (2011).

To find the data Zephyr was used to find information about the TICKER of the IPOs used in this sample. Zephyr was also used to find out if a company was venture capital backed or not. The Wharton Research Data Services database (WRDS) was used to find information about the closing and offer price of the IPOs in our sample. We found 902 different IPOs in our sample. 286 are venture capital backed firms and 616 non venture capital backed firms

Table 1 Summary statistics under pricing

All IPOs Observations 902 Mean 0.0098 Standard deviation 0.0818 Minimum observation - 0.4038 Maximum observation 0.7488

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12 In table 1 there are the summary statistics regarding all the IPOs in the sample. The mean is the mean equal weighted under pricing. The under pricing found is 0.98 % and a standard deviation of 8.18 %. On the site of Jay Ritter, the level of under pricing found in the same period is 11.71 % (‘‘IPOs under pricing 2012’’). This difference is caused by a difference between the samples. In the Jay Ritter sample ADRs, unit offers, closed-end funds, REITs, partnerships, small best efforts offers, banks and S&Ls are excluded from the sample. This is also found in the sample used by Liu and Ritter (2011).

The high standard deviation can be explained by the big differences in under pricing found in the sample. A high standard deviation means that the data is spread out over a large range of values. This corresponds with our data because the highest observation was 74,87 % and the lowest observation was 88.91 %.

Table 2 Summary statistics venture capital backed and non venture capital backed IPOs

In Table 2 the differences between the sample of venture capital backed IPOs and non venture capital backed IPOs are shown. The standard deviations of both samples are close together. This means that the variability in both samples shouldn’t be very different. This is supported by the fact that both samples have similar maximum observations. The lower minimum observation for the non venture capital backed sample can be the cause of an outlier. Another explanation is that as predicted in the literature venture capital backed IPOs have higher under pricing. This means relative lower under pricing for non venture capital firms, as is seen here. This also corresponds with the difference in means compared to table 1. Venture capital backed IPOs have a higher mean under pricing than the mean under pricing of all IPOs and non venture capital has lower under pricing.

Venture capital backed IPOs Non venture capital backed IPOs

Observations 286 616

Mean 0,0132 0,0083

Standard deviation 0,0873 0,0792

Minimum observation -0,4038 -0,8891

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13 Table 3 Summary statistics annual under pricing IPOs

In table 2 there is the further breakdown of the data over the different years. The mean is the mean equal weighted under pricing found in each year. In the crisis years (2008/2009) it is noticeable that there are less IPOs. The low mean in 2009 might be caused by the crisis year, but the 2011 year also has a very low mean. This means that other causes are also plausible. Higher amount of observations show a higher range between the highest and lowest observation. This is what would be expected, higher observations should lead to less variance. In the year 2008 and 2012 there is a very high standard deviation. For 2008 this can be explained because of the low number of observations, but there is still a lot of variability in the sample. In 2012 there is high variability in the data this causes the high standard deviation. Outliers found in this sample won’t be excluded, because it is expected that between IPOs there are big differences. IPOs with higher prices will have higher standard deviations. For that reason the outliers will stay in the sample, because this way the sample more closely resembles the population.

Table 4 Summary statistics annual under pricing venture capital backed IPOs

Year Observations Mean Standard Deviation Minimum Maximum

2007 339 0.0113 0.0472 -0.2547 0.3654 2008 62 0.0120 0.1287 -0.1782 0.7488 2009 73 0.0056 0.0713 -0.1589 0.3122 2010 121 0.0110 0.0697 -0.3147 0.2574 2011 124 0.0004 0.0721 -0.4038 0.2078 2012 183 0.01363 0.1209 -0.2078 0.7483

2007 84 0.0131 0.0468 -0.1111 0.2433 2008 8 -0.0362 0.0451 -0.1158 0.0163 2009 13 0.0208 0.1009 -0.0833 0.3016 2010 41 0.0219 0.0862 -0.3147 0.2574 2011 54 -0.0031 0.0974 -0.4038 0.2078 2012 86 0.0225 0.109 -0.1833 0.6986

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14 Table 5 Summary statistics annual under pricing non venture capital backed IPOs

2007 254 0.0118 0.0445 -0.1122 0.3654 2008 54 0.0147 0.1406 -0.2547 0.7486 2009 61 0.0019 0.0634 -0.1589 0.3122 2010 81 0.0054 0.0591 -0.1829 0.2483 2011 70 0.0028 0.0442 -0.1238 0.1326 2012 96 0.0058 0.1314 -0.8891 0.7483

In table 4 and 5 for most year’s similar means and standard deviations are found. 2008 and 2011 show noticeably different means. This is consistent with what was found in table 3. The negative mean in 2008 can be explained by the very small sample size of 8. This means that outliers easily skew the average as is the case here. For 2011 the negative mean in table 4 is expected. As seen in table 3 the mean in 2011 is very low and in table 4 the mean is also very close to zero. The cause for the low under pricing in this year is uncertain. The amount of observations in 2011 is not significantly lower than other years. The minimum observation in table 4 is lower than other most other years except 2010. This might have caused the negative mean under pricing.

In table 5 for the years 2007 and 2008 the mean is noticeably higher than in the period after that. The first assumption would be that it is caused by the start of the financial crisis in those years. A similar difference is only found for 2007 found in table 4. This means that if it is caused by the financial crisis it is only applicable for 2007. This is expected because 2007 was just before the financial crisis. For 2008 the high mean can be explained by the high standard deviation and the relatively low sample size. The low sample size means that outliers have more effect on the mean. The high standard deviation and high range of the observations means that there is a big difference in observations. Most probable is that outliers caused the high mean of under pricing in 2008.

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4. Empirical results

This section will show an analysis of the data that was gathered with the method shown above. This will be done for overall under pricing and separately for venture capital backed firms and non venture capital backed firms.

4.1 Statistical analysis of IPO under pricing

As mentioned before the sample consists of 902 IPOs issued in the period 2007-2012. This gives us 902 observations of the offer price and 902 observations of the closing price. The level of under pricing can be found by (closing price-offer price)/ offer price as. This is formula (2) in 3.1. Then Stata is used to find the average of our sample and the standard deviation.

4.2 T-test of the difference in under pricing

The first test will be a T-test to decide if the under pricing is significant. This will be a one-sided T-test. Here the data of all 902 IPOs in our sample will be used. The following hypothesis will be tested.

H0: The under pricing in this sample is equal to zero H1: The under pricing in this sample is higher than zero

By having used the following formula t = X/(σ/√n), as was mentioned in 3.1 as formula (1). The data from table 1 will be used. At 1 % significance level the critical t-value 2.326 is found when using 902 observations. This means that given the t-value of 3.61 the null hypothesis can be rejected. So it is plausible that there is under pricing in our sample. This was expected because in all earlier literature there was also found under pricing.

The next thing that will be tested is if the venture capital backed IPOs are more underpriced than non venture capital backed IPOs. To test this mean of the venture capital backed IPOs and non venture capital backed IPOs will be compared. A Welch T-test will be used because of the difference in sample size and unequal variances. The formula used is (3)

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16 in 3.1. Unequal variances were found by using Bartlett’s test in Stata. The population values are not known, so the sample values will be used as estimators.

The mean under pricing for venture capital backed firms is μ1 and the mean under pricing for non venture capital backed firms is μ2. It is expected that the under pricing with venture capital backing is higher than for non venture capital backing. The following hypothesis will be tested

H0 : (μ1-μ2) = 0 H1 : (μ1-μ2) > 0.

In our formula average X will be used because of it being a sample mean.

The formula used is

The data from table 2 is used and the test is done by using Stata. It is found that at a 5 % significance level a t-value of 0,8039 is found. The Welch degree of freedom is 511,11 and the rejection region is H1 > 0,209. Thus the t-value is outside of the rejection region. For this reason H0 can be rejected. This means that venture capital backed under pricing and non venture capital backed under pricing are not equal. Under pricing can be higher for venture capital backed IPOs. Which is what was predicted based on the findings in the IPO. The T-test proves this.

This is an interesting result given that the literature was divided between different theories. The literature is divided between a positive or negative effect on under pricing caused by venture capital backing. In this paper the focus was on higher under pricing caused by venture capital backing. This was also found as a result in our research and corresponds with the results found in Lee and Wahal (2004) and Lee and Ritter (2011).

Important to mention regarding this outcome is that only the relation between under pricing and venture capital were researched. There are many other factors that have an effect on under pricing. Liu and Ritter (2011) have looked at under pricing, but they used control variables for top tier underwriter, all star analysts, the industry and year. That is why with this result the assumptions made about the true effect of venture capital backing on under pricing are less conclusive. There can’t be accounted for the fact that there are

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17 be the control variables mentioned before or other control variables which aren’t known yet. A broad assessment can be made that venture capital backing leads to higher under pricing.

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5. Conclusion

In the literature different theories about the effect of venture capital backing on under pricing were found. The main theories regarding under pricing are that under pricing is a result of information asymmetry or that intentional under pricing is used as a signaling tool. A different theory was about the effect that venture capital backing has on under pricing. To test the effect of venture capital backing on under pricing the theories of Lee, Wahal (2004), Lee and Ritter (2011) were used in this thesis. They perceive venture capital firms as being very dependent on underwriters. This is because the employment of a high quality

underwriter brings a lot of media attention on the firm. That is why venture capitalists have a great preference to get this extra coverage, because they want the highest possible stock prices when they sell their shares. For that reason the expectation was higher under pricing for the venture capital backed sample of IPOs.

In this thesis a sample of 902 companies were used that went public on the American stock markets and met the criteria that are common in the literature. The time period 2007-2012 was covered in this research. This also encompasses the financial crisis of 2008/2009. These criteria were used because the American market was the main geographic area researched in the literature and this time period wasn’t as widely researched as the time period before 2007.

The expectations that followed from the literature were confirmed. The Welch t-test rejected the null hypothesis that the under pricing for venture capital backed IPOs and non venture backed IPOs was similar. This means that venture capital backed IPOs have a significantly different level of under pricing than non venture capital backed IPOs. Therefore it is reasonable to assume that the under pricing in the sample was higher for the venture capital backed IPOs.

This doesn’t mean that conclusively it can be said that venture capital backed IPOs are more underpriced than non venture capital backed IPOs. This study only looks at the significance of the relation of both types of IPOs on under pricing. The higher under pricing that was found for venture capital backed IPOs corresponds with Lee and Wahal (2004) and Lee and Ritter (2011) who also found that venture capital backed IPOs are more under priced than non venture capital backed IPOs. This means that there is now more evidence available that there is a positive effect of venture capital backing on under pricing. More research

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19 should be done on the positive effect that venture capital backing has on under pricing instead of the negative effect that venture capital backing has on under pricing that is mostly prominent in current literature and widely researched.

As seen in the literatures there are many different factors that affect under pricing. This paper looks at the effect of venture capital backing. Liu and Ritter (2011) also included underwriter quality, industry expertise, and coverage of an all-star analyst in their regression. By including those variables a better prediction about the effect on under pricing can be made. The exclusion of these control variables is the main limitation of this research. This is also essential for further research on the effect that venture capital backing has on under pricing. To find more specific factors that contributes to the higher under pricing of shares. The other limitation in this study is the data sample itself. The data sample didn’t meet all the same criteria for exclusion of companies that were found in the earlier literature. This means that the different set up of the data sample has also influenced the results. For this reason in further research it is also important to follow these same criteria and to search for a more specific effect on under pricing which can be done by using more variables.

To conclude after having read the literature and the research that was done in this paper there is evidence found that venture capital backed IPOs and non venture capital IPOs have a significantly higher level of under pricing. This gives more support to the theory that under pricing is higher because of venture capital backing and more research should be done using this theory to test if it is valid. For further research more control variables should be added to find more precise effects that venture capital backing has on under pricing.

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Are venture capital backed IPOs more underpriced than non-venture backed IPOs on the American Stock market in the period 2007-2012?