The dark side of independent venture capitalists: Evidence from Japan

Using Japanese firms that went public during the period 1998–2006, we find that independent venture capitalist-backed IPO firms are significantly younger and smaller than IPO companies backed by venture capital firms that are subsidiaries of financial institutions. IPOs backed by independent venture capitalists also tend to use less reputable underwriters and go public on stock exchanges with less strict listing requirements due to their immaturity. Young and small IPO companies experience significantly greater underpricing and poorer long-term operating performance. Taken all together, independent venture capitalists make lower quality companies go public than finance-affiliated venture capitalists.

► Independent venture capitalists make immature firms go public.
► Independent venture capitalist-backed IPO firms choose less reputable underwriters.
► Independent venture capitalists make firms list on exchanges with loose requirements.
► These firms experience large underpricing and poor long-term performance.
► Finance-affiliated venture capitalists prohibit immature firms from going public.