THE CERTIFICATION ROLE OF PRIVATE EQUITY INVESTORS

ProjectfinancedbytheEuropeanCommission,DGResearchImprovingtheHumanPotentialandtheSocio-EconomicKnowledgeBaseProgrammeKielInstituteofWorldEconomicsInstituteforNewTechnologies,UnitedNationsUniversityUniversityofOxfordUniversityofRome,LaSepienzaWarwickBusinessSchool,UniversityofWarwickAndreaSchertlerKielInstituteofWorldEconomicsNO.02-10THECERTIFICATIONROLEOFPRIVATEEQUITYINVESTORS:EVIDENCEFROMINITIALPUBLICOFFERINGSONTHENOUVEAUMARCHÉ[e-mail]ldEconomicsD—24100KielGermany08March2002AbstractThispaperpresentsanempiricalanalysisofwhetherindependentanddependentprivateequityinvestorsaffecttheunderpricingoffirmswhichwentpublicontheNouveauMarchéandontheNeuerMarktbetween1997and2000.InthesampleoftheNeuerMarkt,theinvolvementofprivateequityinvestorsreducestheunderpricingofthefirms’sharesonlyifprivateequityinvestorssellapartoftheirpre-flotationsharesattheinitialpublicoffering(IPO).Bycontrast,inthesampleofNouveauMarché,privateequityinvestorshavenosignificantimpactontheunderpricing.Moreover,thispaperpresentsanempiricalanalysisofwhetherdependentandindependentprivateequityinvestorsbehavedifferentlywhenthefirmsthattheyhavefinancedgopublic.Whilethetwogroupsofprivateequityinvestorsdonotdifferwithrespecttotheireffectonunderpricing,theydodifferwithrespecttochangesintheirnumberofsharesandthuswithrespecttotheirdivestmentbehaviour.Independentprivateequityinvestorssellsignificantlymoreshareswhentheirfirmsgopublicthantheirdependentcounterpartsdo.Keywords:privateequity,underpricing,initialpublicofferings,NeuerMarkt,NouveauMarché.JELclassification:G32ThepaperhasbeenpreparedundertheFifthEUProgramme,KeyAction,ImprovingtheSocioeconomicKnowledgebaseISSN1682-3739Copyright@2001EIFCConsortium[ContractNoHPSE-CT-1999-00039]PublishedbytheUnitedNationsUniversity,InstituteforNewTechnologies,KeizerKarelplein19,6211TCMaastricht,TheNetherlandsE-mail:[e-mail]:http:\:DOTHEYDIFFER?274.1DESCRIPTIVESTATISTICS274.2REGRESSIONRESULTS305.CONCLUSIONS37REFERENCES3971.INTRODUCTIONEmpiricalanalysessuggestthatventurecapitalists’involvementreducesunderpricingofinitialpublicofferings(IPOs)intheUnitedStates(MegginsonandWeiss1991,Barryetal.1990).Reducingunderpricingisintheinterestofoldshareholdersbecauseunderpricingtransferswealthfromoldshareholderstonewones(Gompers1996).Therecentliteraturediscussestwosourcesofadvantagesthatventurecapitalists’involvementhasforfirmsgoingpublic(Ljungqvist1999).First,venturecapitalistsmayreducetheasymmetricdistributionofinformationbetweenuninformedoutsideinvestorsandthefirmsgoingpublic.Second,theymayreducetheasymmetricdistributionofinformationbetweenunderwriters,i.e.,investmentbanks,andthefirmsgoingpublic.Thispaperdealswiththefirstsourceofadvantageswhichventurecapitalists’involvementcangenerate,i.e.,withthecertificationroleofventurecapitalists.SeveralempiricalstudieshaveanalysedthisroleintheUnitedStates.MegginsonandWeiss(1991)matchasampleofventure-capital-backedfirmswithnon-venture-capital-backedfirmsandfindthatventure-capital-backedfirmsaresignificantlylessunderpriced.Barryetal.(1990)findevidencethatventure-capital-backedIPOsexperiencelowerunderpricingthannon-venture-capital-backedIPOs.Venturecapitalists’involvementiscapturedbyseveralproxiessuchasthenumberofventurecapitalistswithequitystakesbeforetheIPO,theirfractionofsharesbeforetheIPO,andthecumulativenumberofpriorIPOsinwhichtheleadventurecapitalisthasparticipated.BravandGompers(1997)findevidencethatventure-capital-backedfirmsoutperformnon-venture-capital-backedonesevenaftertheIPO.ThecertificationroleofventurecapitalistshasalsobeenanalysedforIPOsoutsidetheUnitedStates.Bergströmetal.(1995)replicatetheanalysisofBarryetal.(1990)forasampleofSwedishIPOs.Intheirsample,thecumulativenumberofpriorIPOsinwhichtheleadventurecapitalisthasparticipatedistheonlysignificantvariablewhichnegativelyaffectstheunderpricing.Franzke(2001)analysesasampleoffirmswhichwentpublicontheNeuerMarktbetween1997andMarch2000.Shefindsevidencethatfirmswhicharebackedbyhigh-rankedprivateequityinvestorsareunderpricedlessthantheotherfirmswhichareeithernotprivate-equity-backedorfirmswhicharebackedbylow-rankedprivateequityinvestors.Inthispaper,IuseasampleoffirmswhichwentpublicontheNeuerMarktinFrankfurtandontheNouveauMarchéinParisbetween1997and2000inordertodeterminewhetherprivateequityinvestorscertifythequalityofthefirmsgoingpublicandthusreduceunderpricing.Underpricingisdefinedastheopeningpriceofthefirsttradingdayminustheofferprice,scaled8bytheofferprice.ThetermprivateequityisusedhereinsteadofventurecapitalbecausesomeFrenchandGermaninvestorsarelegallyconnectedtotheircapitalproviderssuchasprivatebanksandcorporat