Post-IPO Operating Performance, Venture Capital and the Bubble Years

Abstract:  We analyse the post-issue operating performance of 316 venture-backed and 274 non-venture UK IPOs 1985–2003. The finding of a statistically significant five-year, operational decline exhibited over the full sample period is not robust. Rather it is driven by the dramatic underperformance during the 1998–2000 bubble years while IPOs perform normally in the remaining years. Cross-section regression results indicate support for venture capital certification in the non-bubble years but a significantly negative relationship between operating performance and venture capitalist board representation during the bubble years. The bubble year underperformance is explained by market timing and by low quality companies taking advantage of investor sentiment.     

UK IPO underpricing and venture capitalists

We analyze the nature and causes of short-run underpricing for a unique sample of 591 Initial Public Offers (IPOs) issued on the London Stock Exchange for the period 1985–2003. We find significant differences between the 1998–2000 bubble years and the rest of the sample. Venture capitalists and reputable underwriters played a certification role in the latter period but not during the bubble years. These years featured significant increases in underpricing, money left on the table, and a decline in operating quality. The combination of venture capitalists and prestigious underwriters was increasingly associated with the highest underpricing witnessed during 1998–2000, which provides indirect support for the spinning hypothesis.