Library:
Paris Champerret
Madrid
London
Paris Montparnasse
Turin
Berlin
- Item type
- Study and report
- Dissertation
- Language
- English
- Publication year
- 2024
- Contributors
- Subjects
- FINANCES
We examine secondary shares sold by venture capitalists (VCs), the signal conveyed to the public and the resulting impact on post-IPO performance. As early investors, VCs might be interested in divesting their stakes during a company’s IPO for several reasons. (i) Firstly, they might be driven by negative private signals regarding the future performance of the company’s business. Asymmetric information places VCs at a vantage point, encouraging them to divest before the market correctly prices the shares. (ii) Secondly, VCs might be motivated by capital and expertise allocation constraints arising from alternative venture opportunities. (iii) Thirdly, VCs’ ultimate aim is to increase the fund’s performance measured through IRR. They might be interested in divesting their stakes earlier during an IPO to artificially increase the IRR and, hence, the fund’s performance. (iv) Additionally, VCs must factor in their fund’s reputation when deciding whether to divest by selling overpriced shares during an IPO or wait for a more opportune moment to exit their investment. The possibility of post-IPO underperformance may cast doubts on the fund’s reliability and its ability to select promising businesses, compromising their future investment attractiveness.
All these considerations led us to formulate our research question. This research project aims to investigate the relationship between secondary shares sale and post-IPO performance, as well as identify the drivers that motivates VCs to sell.
Performance has been taken into consideration by analysing both gross and net returns for accuracy's sake. Additionally, the analysis spans two different time horizons, considering short term returns (30 days after IPO date) and long term returns (365 days after IPO date). IPOs that occurred from 2002 to February 2024 were investigated in this analysis. For the purposes of this research project, only the companies’ IPOs listed on the New York Stock Exchange (NYSE) and the Nasdaq Stock Exchange (NASDAQ) have been examined. Lastly, we used an OLS regression model to conduct the analysis.
The output of the regression confirmed the presence of a significant negative correlation between secondary share sales and post-IPO performance, for both net and gross returns. Furthermore, the persistence of this negative correlation over longer returns indicates that it is no longer market perception to drive down performance, but rather company's fundamentals, business model, management expertise and competitive advantage. This confirms that VCs, recognizing the limited potential of a portfolio company and anticipating low future returns, benefit from the public offering by opportunistically divesting their stakes and achieving higher returns than expected in the future.
