Information production within the venture capital market: Implications for economic growth and development

• Initial returns to VC and non-VC backed IPOs converge over time.
• Convergence induced by arrival of favorable information about VC backed IPOs.
• Venture capital helps decrease valuation uncertainty within public equity markets.
• Venture capital can be a component of price discovery processes (within public equity markets).
• Venture capital is beneficial for stock market development.

I find venture capitalists’ (VCs’) information production activities help decrease uncertainty about asset valuations within public equity markets, resulting in price convergence within the cross-section of Initial Public Offerings (IPOs) that are backed by different classes of VCs and price convergence between VC and non-VC backed IPOs. These findings provide evidence that venture capital financing can be a component of an effective or efficient price discovery process within public equity markets that yields beneficial externalities in so far as the pricing of non-VC backed IPOs are concerned. Given a decrease in valuation uncertainty ultimately results in lower costs of capital for issuing firms, larger stock markets, and improvements in market liquidity or efficiency, empirical findings provide evidence that VCs’ information production activities are beneficial for economic growth and economic development (price discovery processes that induce efficient allocation of resources within stock markets).