The Venture Capital Puzzle

Abstract

We study the relationship between venture capital backing and IPO underpricing in European markets from 2000 to 2023. Analyzing 6,637 IPOs with parametric and non-parametric tests, we find that VC-backed IPOs generally outperform non-VC-backed IPOs in first-day returns, both in the overall dataset and in a narrower time frame surrounding AIFMD’s regulatory implementation in 2011. By dividing Europe into legal origins, we observe indications that higher-governance regions may experience lower underpricing post-law.The trend aligns with our hypothesis that increased market efficiency reveals the asymmetric information advantage that VCs can have. Despite these indications, the lack of statistical significance prevents us from conclusively supporting this hypothesis.