Institutional affiliation and the role of venture capital: evidence from initial public offerings in Japan

The presence of venture capital in the ownership structure of U.S. firms going public has been associated with both improved long-term performance and lower underpricing at the time of the IPOs. In Japan, we find the long-run performance of venture capital-backed IPOs to be no better than that of other IPOs. Many of the major venture capital firms in Japan are subsidiaries of securities firms that may face a conflict of interest when underwriting the venture capital-backed issue. When venture capital holdings are broken down by their institutional affiliation, we find that firms with venture backing from securities company subsidiaries perform significantly worse over a three-year time horizon than other IPOs. We also find that IPOs in which the lead venture capitalist is also the lead underwriter have higher initial returns than other venture capital-backed IPOs, and sell at higher P/E ratios than comparable listed stocks. These results suggest that conflicts of interest influence the pricing and long-run performance of initial public offerings in Japan.