Pre-IPO firm performance and corporate governance of U.S. IPO firms : does venture capitalists backing matter?

This study examines differences between venture-backed and non venture-backed IPO firms in three aspects. First, operating performance and firm growth are examined in the pre-IPO period and in the IPO year. Second, differences in the corporate governance mechanisms in place at the time of the IPO are considered. In order to do so, board structure and directors' ownership and voting power are considered. Third, differences in the degree of IPO underpricing between the two groups are tested. Possible relationships of IPO underpricing with firm performance and corporate governance are also explored. We find venture-backed firms experience poorer operating performance in the IPO year as well as in the four years preceding it. On the other hand, they show higher growth in operating performance and revenues compared to non venture-backed firms. Board size is positively related to the number of VCs involved, but negatively related to VCs' ownership in the firm. Venture-backed firms have more outside directors but fewer independent directors on their board compared to non venture-backed firms. In addition, CEO duality is less common in venture-backed firms. Finally, IPO underpricing is larger for venture-backed firms, except for firms in the smallest size quartile. We also find underpricing not to be significantly related to firm performance and corporate governance mechanisms.