How Do Corporate Venture Capitalists Create Value for ...

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measure of underwriter reputation used by Loughran and Ritter (2003). Second, similar to Loughran and Ritter (2003), we use a dummy for the underwriter reputation that takes a value of 1 if the reputation measure is 8 or higher. Our results show that the average underwriter reputation for CVC backed firms is higher than that for IVC backed firms (8.02 versus 7.45). The percentages of the companies with a high-reputation underwriter are 82% for CVC backed issuers versus 67.9% for IVC backed issuers. The evidence clearly suggests that CVC backed IPOs are associated with higher quality underwriters compared to IVC backed IPOs. The differences are statistically significant at the 1% level. In addition to the univariate analysis we conduct a regression analysis that allows us to control for various other factors affecting quality of underwriters. Along the traditional control variables such as size (log of total assets) and share of the firm equity sold in IPO we include: (i) reputation of existing IVCs; (ii) operating performance characteristics. We argue that presence of IVCs co-investing with CVCs might affect quality of underwriters (as well as other reputable market players). In addition, higher quality underwriters might be more selective in choosing IPO companies to run books for and are likely to back higher quality (as measured by profitability and/or growth) firms. Panel A of Table 6b presents the results of the regression analysis. Consistent with the univariate analysis results we find that CVC backing improves quality of underwriters for IPO firms. Furthermore, the higher the CVC share of total venture investment in an IPO firm, the better the underwriters’ quality. 7.2 Participation by Institutional Investors In this sub-section we analyze the influence of corporate venture capitalists on institutional investors’ participation in IPOs backed by them. We study two measures of institutional investors’ involvement in IPOs. First, we evaluate the number of institutional investors investing in an IPO firm. Second, we look at first quarter post-IPO institutional investor holdings as a percentage of the number of shares sold in the IPO. We obtain institutional investors holdings data for IPOs in years 1980 to 2004 from the Spectrum Institutional (13f) Holdings Database of Thomson Financial. 24
Panel B of Table 6a reports the results of our analysis of institutional investors’ participation measures. The measures are unanimous. Relative to IVC backed IPOs, CVC backed IPOs have around 19% higher percentage of shares sold in the IPO held by institutional investors, and 7.6 more institutional investors involved. These differences are not only statistically but also economically significant. Since the degree of institutional investors’ participation may also be affected by better quality underwriters (in addition to venture capital backing), IVC backing, and quality of an IPO firm going public, we control for these effects through a regression analysis of institutional investor participation reported in Panel B of Table 6b. In this analysis we find that the presence of corporate venture backing adds 3.37 additional institutional investors to the IPO firm; each additional CVC investor brings on average of 2 more institutional investors. Furthermore, the degree of participation by institutional investors is positively related to the CVC amount invested in a company normalized by total venture investment, and the presence of a CVC parent(s) in an industry related to the IPO firm. The positive sign of the size coefficient suggests that institutional investors are indeed more likely to invest in bigger IPOs. 7.3 Analyst Coverage of IPO Firms In Panel C of Table 6a we present a univariate analysis of analyst coverage of IPO firms. The data is taken from the I/B/E/S database. We evaluate a percentage of IPOs with analysts coverage as well as the number of distinct analysts issuing annual forecasts within a year after a firm’s IPO date. 15 The number of analysts is assigned to be zero if there is no information about the company in I/B/E/S. We find that a significantly larger percentage of CVC backed firms receive analyst coverage and that these firms are followed by a larger number of analysts compared to IVC backed IPO firms. We find that analysts follow 93% of CVC backed IPOs versus 86% of IVC backed IPOs. CVC backed firms also enjoy roughly 1.7 more analyst following than IVC backed firms. 15 We also conduct the analyst coverage analysis based on quarterly earning forecasts in I/B/E/S and obtain qualitatively similar results. 25
Page 1 and 2: How Do Corporate Venture Capitalist
Page 3 and 4: 1. Introduction How Do Corporate Ve
Page 5 and 6: documented that IVCs are able to cr
Page 7 and 8: control for firm industry, size, an
Page 9 and 10: Overall, our empirical findings ind
Page 11 and 12: a CVC since they represent financia
Page 13 and 14: Table 1 presents the summary statis
Page 15 and 16: We start with the probit analysis o
Page 17 and 18: could have received CVC financing b
Page 19 and 20: firms’ industry dummies to accoun
Page 21 and 22: experience similar time from first
Page 23 and 24: acking is of higher quality (in oth
Page 25: investment IPO firms are more likel
Page 29 and 30: IPO market, CVCs are able to attrac
Page 31 and 32: Market price is CRSP stock price an
Page 33 and 34: IVC backing dummy, and the reputati
Page 35 and 36: Our findings can be summarized as f
Page 37 and 38: Lindsey, L., 2004, “The Venture C
Page 39 and 40: Table 2a Patterns of Corporate Vent
Page 41 and 42: Table 3 Amount Invested and Pricing
Page 43 and 44: Table 4b Exit Strategies for CVC Ba
Page 45 and 46: Table 5b Probability of Delisting f
Page 47 and 48: Table 6b Market Participants in CVC
Page 49 and 50: Table 7b Valuation of CVC Backed an

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