UNDERPRICING OF VENTURE BACKED IPOS AND NON-VENTURE BACKED IPOS: AN EMPIRICAL STUDY BASED ON CHINA’S CHINEXT BOARD

Abstract

This paper examines the differences between Venture capital (VC) backed IPOs and non-VC backed IPOs using 178 samples from China’s new stock exchange board, the ChiNext. The focus of this study is on the certification effects of VC backing, particularly in terms of IPO underpricing. Using univariate analysis and multivariate analysis, we find that VC backed IPOs show greater underpricing. This result is significant and robust to various tests. We also find IPO valuation in terms of issuing price to earnings multiple is lower for VC backed IPOs compared to non-VC backed IPOs. In addition, VC backed IPOs are generally larger than non-VC backed IPOs in terms of offer size, total asset and revenue and they are more likely to hire reputable underwriters. Two theories that may explain the association between higher underpricing and VC backing are explored, namely grandstanding theory and information momentum theory. Some of our observations are consistent with these two theories.