Advanced

The JOBS Act and the Role of Venture Capital-Backing in Initial Public Offerings: Revival of Self-serving Collaborators

Willersen, Birger LU and Sassen, Morten LU (2018) BUSN79 20181
Department of Business Administration
Abstract
Course: BUSN79 Business Administration: Degree Project in Accounting and Finance Seminar Date: June 1, 2018
Authors: Morten Henrik Sassen & Birger Willersen
Advisor: Prof. Lars Oxelheim
Purpose: This study aims to empirically examine the effects of the Jumpstart Our Business Startups (JOBS) Act of 2012 on a perspective hitherto neglected by the recently emerging JOBS literature: The role of venture capital-backing in initial public offerings (IPOs). By exploiting the Act as an exogenous regulatory shock and natural experiment, we intend to shed light on the controversially discussed and puzzling part of VCs in IPOs of their portfolio firms. Thereby, the study further aims to reveal possibly unintended and alarming side-effects of the... (More)
Course: BUSN79 Business Administration: Degree Project in Accounting and Finance Seminar Date: June 1, 2018
Authors: Morten Henrik Sassen & Birger Willersen
Advisor: Prof. Lars Oxelheim
Purpose: This study aims to empirically examine the effects of the Jumpstart Our Business Startups (JOBS) Act of 2012 on a perspective hitherto neglected by the recently emerging JOBS literature: The role of venture capital-backing in initial public offerings (IPOs). By exploiting the Act as an exogenous regulatory shock and natural experiment, we intend to shed light on the controversially discussed and puzzling part of VCs in IPOs of their portfolio firms. Thereby, the study further aims to reveal possibly unintended and alarming side-effects of the Act that pertain to founders, investors, regulators, and politicians alike.
Methodology: By means of employing a deductive quantitative approach, hypotheses are derived from applicable finance theory and tested in systematic empirical investigations utilizing econometric techniques. Specifically, we follow the JOBS literature’s call for comparative research designs by integrating a difference-in-differences methodology into both probit binary response and linear regression models, allowing us to sidestep typical endogeneity issues apparent in connatural contexts. Parallel trend inspections, falsification tests, period restriction replications, and placebo tests were conducted to ensure internal validity.
Theoretical Perspectives: This study takes up theoretical implications of the recently emerging JOBS literature and relates them to the controversially discussed concepts of VC certification, grandstanding, and collaboration. It particularly contrasts former VC signaling theories in the context of enhanced investor uncertainty and is consistent with more recent theoretical perceptions that shorter investment horizons on the part of VCs are accompanied by behavioral biases and potentially severe conflicts of interest at the IPO stage of their ventures.
Empirical Foundations: The empirical analysis is based on an extensive sample of 1,043 VC-backed and non-backed U.S. IPOs between January 2003 and August 2017.
Conclusion: Our empirical results suggest that the JOBS Act results in (i) a relative surge of VC-backed IPOs among JOBS-affected issuers, (ii) enhanced underpricing of JOBS-affected IPOs that is heavily concentrated in VC-backed offers, and (iii) increased post-IPO analyst coverage for JOBS-affected IPOs that is, again, condensed in VC-backed IPOs. Based on these findings, we offer a theory in which the JOBS Act is accompanied by both amplified incentives and the regulatory prerequisites for revived collaboration between VCs and underwriters. Focusing on different prices, the two parties are assumed to serve their own interests and exchange favors at the expense of long-term venture prospects. (Less)
Please use this url to cite or link to this publication:
author
Willersen, Birger LU and Sassen, Morten LU
supervisor
organization
course
BUSN79 20181
year
type
H1 - Master's Degree (One Year)
subject
keywords
JOBS Act, IPOs, Venture Capital, Securities Regulation, Information Transparency, Collaboration, Underpricing, Analyst Coverage.
language
English
id
8954005
date added to LUP
2018-07-03 11:08:48
date last changed
2018-07-03 11:08:48
@misc{8954005,
  abstract     = {Course: BUSN79 Business Administration: Degree Project in Accounting and Finance Seminar Date: June 1, 2018
Authors: Morten Henrik Sassen & Birger Willersen
Advisor: Prof. Lars Oxelheim
Purpose: This study aims to empirically examine the effects of the Jumpstart Our Business Startups (JOBS) Act of 2012 on a perspective hitherto neglected by the recently emerging JOBS literature: The role of venture capital-backing in initial public offerings (IPOs). By exploiting the Act as an exogenous regulatory shock and natural experiment, we intend to shed light on the controversially discussed and puzzling part of VCs in IPOs of their portfolio firms. Thereby, the study further aims to reveal possibly unintended and alarming side-effects of the Act that pertain to founders, investors, regulators, and politicians alike.
Methodology: By means of employing a deductive quantitative approach, hypotheses are derived from applicable finance theory and tested in systematic empirical investigations utilizing econometric techniques. Specifically, we follow the JOBS literature’s call for comparative research designs by integrating a difference-in-differences methodology into both probit binary response and linear regression models, allowing us to sidestep typical endogeneity issues apparent in connatural contexts. Parallel trend inspections, falsification tests, period restriction replications, and placebo tests were conducted to ensure internal validity.
Theoretical Perspectives: This study takes up theoretical implications of the recently emerging JOBS literature and relates them to the controversially discussed concepts of VC certification, grandstanding, and collaboration. It particularly contrasts former VC signaling theories in the context of enhanced investor uncertainty and is consistent with more recent theoretical perceptions that shorter investment horizons on the part of VCs are accompanied by behavioral biases and potentially severe conflicts of interest at the IPO stage of their ventures.
Empirical Foundations: The empirical analysis is based on an extensive sample of 1,043 VC-backed and non-backed U.S. IPOs between January 2003 and August 2017.
Conclusion: Our empirical results suggest that the JOBS Act results in (i) a relative surge of VC-backed IPOs among JOBS-affected issuers, (ii) enhanced underpricing of JOBS-affected IPOs that is heavily concentrated in VC-backed offers, and (iii) increased post-IPO analyst coverage for JOBS-affected IPOs that is, again, condensed in VC-backed IPOs. Based on these findings, we offer a theory in which the JOBS Act is accompanied by both amplified incentives and the regulatory prerequisites for revived collaboration between VCs and underwriters. Focusing on different prices, the two parties are assumed to serve their own interests and exchange favors at the expense of long-term venture prospects.},
  author       = {Willersen, Birger and Sassen, Morten},
  keyword      = {JOBS Act,IPOs,Venture Capital,Securities Regulation,Information Transparency,Collaboration,Underpricing,Analyst Coverage.},
  language     = {eng},
  note         = {Student Paper},
  title        = {The JOBS Act and the Role of Venture Capital-Backing in Initial Public Offerings: Revival of Self-serving Collaborators},
  year         = {2018},
}