Venture Capitalists, Insider Ownership and Firm Performance Around Ipos: Small Firm Evidence

With a focus on small Initial Public Offerings (IPOs), this study analyzes the relationship among insider ownership, venture capitalists, and firm performance.Two hypotheses are formulated:venture capitalists are associated with better performance in small firms, and higher insider retention of shares after the IPO is associated with better stock market performance in small firms. As provided by the SDC New Issues database, the sample consists of firm-commitment IPOs with less than $35 million in sales during the 1980-1998 sales periods.Characteristics of the firms both prior to and following the IPO are accounted for to provide a clearer view of IPO performance.The characteristics of both the companies and the offerings are defined, as are ownership characteristics and stock performance.Using univariate and multivariate analyses, the findings indicate that higher insider ownership retention and venture capital (VC) involvement in small firms signaled quality for new firms. Some additional findings include the increased value of VC-backed firms following the IPO. In contrast, a decrease in value of majority-owned small firms following the IPO is noted. This decrease in value is ameliorated by VC presence and higher insider ownership retention following the IPO.(AKP)