Long-Term Performance of Initial Public Offerings : Venture Capitalists and Reputation of Investment Bankers

Unlike previous research, this study examines the relation between the reputation of investment bankers and the long-term performance of IPOs in a framework that simultaneously controls for the influence of venture capital. Using 456 IPO transactions over the 1989-1994 period, our analysis provides no evidence in support of the view that the quality of underwriters exerts more influence on the long-term performance of IPO firms than venture capital. The findings of this paper suggest that previous studies overstate the relation between the quality of underwriters and the long-term performance of IPOs by ignoring the role of venture capital. Consistent with Brav and Gompers (1997), it is also shown that venture-backed IPOs outperform non-venture-backed IPOs. When returns are adjusted for size, book-to-market and industry characteristics, the performance of IPOs is not significantly different from that of their peers. Overall, the evidence suggests that it pays for investors to rely on the venture capital than the reputation of investment banker in certifying the quality of IPOs