Underpricing of Ipos and the Certification Role of Venture Capitalists: Evidence from Germany's Neuer Markt

Abstract

This paper analyses the underpricing of IPOs and the role of venture capitalists in solving the underpricing problem for a data set of 124 venture capital backed and 184 non-venture capital backed companies that went public on Germany's Neuer Markt between March 1997 and May 2001. The slightly mitigated underpricing of venture capital backed IPOs becomes insignificant after controlling for ex-ante uncertainty and underwriter reputation with an interactive dummy variable approach. The two groups of companies do not differ either with respect to their risk characteristics or with respect to the reputation of the underwriter. However, venture capital backed companies that are underwritten by top banks seem to be underpriced more than their non-Venture Capital backed counterparts. Similarly, the impact of a similar level of ex-ante uncertainty on underpricing appears to be much weaker for venture capital backed IPOs. Therefore, this study provides evidence for different investor-perceptions of venture capital backed companies and supports a competitive rather than complementary interaction of venture capitalists and underwriters.