The Long-Term Performance of Venture Capital Backed IPOs: Comparing The United States and Europe

The Long-Term Performance of Venture Capital Backed IPOs:
Comparing the United States and Europe
Author: Belizar Marinov

Supervisor: Marco Da Rin
School of Economics and Management, Tilburg University
November, 2012
Long-Run Performance of VC-Backed IPOs: US & Europe 2
Abstract
I compare the long-term performance of US and European VC-backed IPOs over a
period of three and five years. The employed methods include event time techniques such as
buy-and-hold returns, and also the calendar time portfolio method. I find mixed evidence in
support of the hypothesis that US ventures outperform European counterparts. I distinguish
the two regions by the origin of the portfolio company and the nation of the VC firm. I
observe that the number of VCs involved in an IPO is inversely related to its performance.
Keywords: venture capital, initial public offering, long-term performance, europe
JEL Classification: G24; G32; G14; G15

I. Introduction
Venture capitalist investors (VCs) have established themselves as an important player and
facilitator in the going public process, particularly in the United States market. Their
specialization in the financing of innovative company makes them interesting to researchers,
since as an intermediary they minimize asymmetric information and channel economic
resource to risky businesses that have potential to generate great added value. Most studies
that investigate the relationships between venture capitalists and their portfolio companies
have been focused on the US. With this study I aim to examine possible differences in the
long-term performance of US and European VC-backed IPOs. On one hand I investigate
whether companies from either region tend to outperform their peers, and on the other hand I
want to find out if any difference in performance can be attributed to the regional origin of the
participating VCs.
My sample covers US and European venture-backed IPOs that took place between
1992 and June 2009. Using buy-and-hold abnormal returns in respect to the MSCI World
index, I do not find significant difference in performance between US and European venture-
backed IPOs over a period of three and five years. When cumulative monthly abnormal
returns are used, US companies significantly outperform European ones. In the framework of
calendar time portfolio returns and the Fama French three-factor model, companies based in
Europe or financed by European VCs tend to show underperformance in respect to peers over
a 36-month period. I test the relationship using both equally weighted and value weighted
returns, as well as in a WLS setting where each month is weighted proportionally to the
number of event firms. When the calendar time window is extended to 60 months, company
and VC origin lose significance. In all regressions except CARs, the number of VCs involved
in an IPO, exhibits negative relationship to its performance.
The paper is organized as follows. Section II relates this study to existing literature on
venture capital and initial public offerings of portfolio companies. In section III I describe my
dataset, followed by discussion of methodology in Section IV. Empirical results are presented
in Section V. Section VI concludes. The discussed tables are placed after the main body of the
paper.
II. Literature review
The role of VCs in the IPO process is documented by many studies including Barry et
al. (1990), Lerner (1994) and Megginson and Weiss (1991). Sahlman (1990) and Ritter (2012)
show that a third of US IPOs are backed by a VC firm. Not surprisingly most of the empirical
evidence makes use of North American data, and that also applies to the citations throughout
this work, unless otherwise noted.
VCs are known to be active investors that support their portfolio companies by
contributing their expertise and large networks of business contacts. Barry et al. (1990) find
that VCs continue to hold concentrated stakes in the companies they invest in even one year
after an IPO, while also continuing to keep a seat on the corporation's board. This VC
involvement is found to be associated with improved survival profile of the IPO company by
means of guiding managers to spend more on R&D, increasing visibility to institutional
investors during road shows, engaging top investment bankers and a larger number of equity
analysts (Jain and Kini (2000)). In addition Megginson and Weiss (1991) find that VC-backed
issuers benefit from lower gross spreads charged by the IPO underwriter and lower issue
underpricing. Overall around one third of IPO companies fail or are acquired within the five
years after going public (Jain and Kini (1999) and Field (1998)).
MacIntosh (1997) identifies five principle types of exits that VCs use in regard to their
portfolio companies investments. In an IPO the company issues public stock, and the VC
typically winds down its position over the months or years following the listing. In an
acquisition exit the whole company is being sold to a third party by means of share sale,
merger or sale of assets. In an exit conducted via a secondary sale the VC sells its stake to a
third party, which may be a strategic buyer or another VC fund. The difference in respect to
an acquisition is that in the secondary sale the VC is the only investor that sells its shares. In a
buyback exit the VC stake is being repurchased by the entrepreneur or the company's
management. In a write-off the VC walks away from the investment, which most often is due
to a failure of the business.
Most VC exits are conducted through management buyouts or acquisitions, with IPOs
being less frequent, but associated with higher returns (Amit et al. (1998)). Further Gompers
and Lerner (1997) find that venture capitalists reap most of their profits from companies that
go public. A study by Brau et al. (2003) reports a “valuation premium” of 22% for IPOs over
acquisition exits. In addition Cumming and MacIntosh (2003) find that in partial exits,
average annual rates of return to VCs are 84% in IPOs, in contrast to 20% in acquisitions. Da
Rin et al. (2011) observe that IPOs were the most important exit route in the US up until the
dot-com bubble, but their role has diminished since then, and they have rarely been that
crucial to VCs in other parts of the world.
When considering the possibility for an IPO exit, venture capitalists take into account
not only factors specific to the particular portfolio company, but also the general state of the
equity market. Lerner (1994) shows that VCs take companies public at times when market
valuations are high, and resort to private financings when markets are falling. Additionally,
Lerner et al. (2003) find that during a hot market biotechnology companies make more use of
funding provided by the public markets, whereas strategic alliances are preferred in times of
market downturn. Ball et al. (2011) also show that IPO exits are favored over acquisitions
when markets are high, however the authors argue that this is not driven by opportunistic VC
behavior that exploits excessive market optimism, but rather as a response to changing market
factors. This contrasts the respective two hypotheses, namely that issuers exploit overpriced
markets (market timing) and that issuers respond to increased returns in the business (pseudo
market timing).
Related to the hypothesis for market timing is the well-researched phenomenon of

long-term IPO underperformance. Ritter (1991) and Loughran and Ritter (1995) establish that
initial public offerings tend to significantly underperform the market. Brav and Gompers
(1997) compare the long term performance of VC-backed and non-VC-backed IPOs, and
conclude that the VC-backed issues outperform the rest of the sample over a five-year period,
particularly when equally weighted, and not so much when value weighted. Further the
authors challenge the idea that IPOs underperform the market in the long run, they rather
suggest that underperformance is not an IPO effect, and that it can be explained by an
improved risk factor specification using the Fama-French 3-factor model. Overall the
performance results are not robust to the change of sample period. Ritter (2011) provides an
update on the horse race between VC-backed and non-VC-backed IPOs, and he shows that
while VC companies tended to outperform peers until 1998, the pattern has since been
reversed. Da Rin et al. (2011) conclude that there are few results that remain valid across time
and geography regarding the long-run performance of VC-backed IPOs.
Among the pool of VC-backed IPOs, researchers have studied how the profile of the
particular VC can influence the stock performance of the newly listed company. Barry et al.
(1990) find that IPOs with higher-quality VCs experience smaller underpricing. Proxies for
VC reputation have been found to be connected with company performance, these include
age, number of investment rounds, cumulative aggregate investment etc. A study by Nahata
(2008) finds the cumulative dollar capitalization of IPOs backed by the VC to be a good
predictor of a successful company exit, timely access to public markets, and level of asset
productivity at IPO. Krishnan et al. (2011) suggest that VCs with higher reputation, as
measured by the market share of their former portfolio companies, help their IPO companies
to outperform even after controlling for the fact that reputable VCs choose to invest in better
businesses.
The venture capital environment, that allows so many new innovative businesses to
quickly get from the garage to the global market scene, has always been a trade mark of the
United States. Naturally, the developing VC markets in other parts of the world are being
benchmarked against the US. Arguably, Europe is the most important VC region outside the
US, and the present work is focused on it. Hege et al. (2003) compare Europe and the United
States, using a sample of survey data and VentureXpert records. They find that US VCs
exhibit significantly higher performance on average, as proxied by the type of exit and
investments' internal rate of return. They argue that this is due to American VCs' extensive
use of contingent control rights (and superior project screening ability. Another explanation is
offered by the findings of Schwienbacher (2005), who concludes that European VCs exert
less monitoring over their portfolio companies and also face less liquid markets for key
employees and for sale of shares. For the relevant discussion on contingent control rights and
the suggested exacerbated "hold-up" problem see Aghion and Bolton (1992), Hart and Moore
(1994).
Bessler and Seim (2011) study a European sample of VC-backed IPOs and find that
they outperform the market in a medium term of 1-2 years, but not when the horizon is
extended to three years. On the other hand, they find a significant long run outperformance by
the VC-backed IPOs over a control sample of IPOs that lacked VC involvement. Bottazzi and
Da Rin (2002) investigate a sample of European VC technology companies, and do not find
significant difference in post-IPO operating performance when compared to a group of non-
VC backed public counterparts. Ber and Yafeh (2005) also do not find substantial difference
in the performance of VC-backed public companies for an Israeli sample. Tykvova and Walz
(2005) study VC-backed companies going public on the German market for high-tech stocks
(the now defunct Neuer Markt) and find significant outperformance compared to non-VC
backed IPOs, but only when the VC is independent from government sponsored financing
schemes.
The last point is particularly sensitive to European lawmakers, who over the years
have tried to spur innovation by helping the development of an active VC industry. Da Rin et
al. (2006) find that there is no shortage of VC financing in Europe and also that public
spending on R&D is ineffective, and that governments should rather focus on labor
liberalization, tax reductions and creating avenues through which innovative companies can
go public.
III. Data
This study covers the long-term performance of the initial public offerings of US and
European companies that received venture capitalist funding. First, I use the VentureXpert
database, via Thomson One, to identify a list of such VC-backed IPOs. I restrict my initial
sample to non-financial companies, based either in US or Europe, which received VC funding
and underwent an IPO between 1980 and June 2009. After filtering some duplicates records, I
get a sample of around 3500 IPOs. Not surprisingly, the US sample is a few times greater than
the European one.
The next step is to download historical stock information for the respective list of
portfolio companies. Since VentureXpert is developed independently from other financial
databases, it lacks company identifiers that could allow records to be matched with external
sources for securities data. In particular, my choice of source is Thomson Reuters Datastream,
which arguably possesses the best international coverage for equities. I proceed with
downloading a list of all common equity issues, dead and active, that are associated with each
of the 27 countries that appear in my initial sample of VC-backed IPOs.
I perform a manual procedure of matching the IPO companies from VentureXpert

with a respective security record in Datastream. The list of equities is in excess of one
hundred thousand, and I nearly halve it by focusing only on issues that are marked "Primary"
and "Major Security", thus to a large extent I eliminate depository receipts and special classes
of shares. Because company names are often spelled differently in the two databases, I
perform matching based on part of the name, using wildcards and the IPO date as a second
check. A criterion is for the IPO date from Thomson One to be within +/- 14 days around the
first data point for the security in Datastream (known as the base date). There are cases where
Datastream picks up a security time series with a delay in respect to its IPO, and I make the
effort to exclude such misleading records. I also use the help of the SDC equity issues
database, so for some cases where there were conflicts between VentureXpert and Datastream
I used judgment by having a third independent source of information.
After the above procedure, I managed to match around 2500 of the IPOs. The
European sample consisted of a little more than 500 entries. Because the first European IPO
was in 1992, I excluded all US IPOs preceding that year. This left a list of 2029 companies,
511 of which are European. The European sample contains firms from 21 countries.
All data regarding VC participation is derived from VentureXpert. Stock data and
Control variables are mainly taken from Datastream/Worldscope with some supplementation
from VentureXpert, SDC and Compustat Global. The Fama-French global factors are
obtained from Kenneth French's website.
Although the sample of IPOs that remained in the working dataset is in excess of
2000, in all analytical procedures and regressions the number of companies is smaller.
Naturally, I have excluded a dozen or so companies that have missing or flat total return series
in Datastream. Another peculiarity is the fact that the first datapoint in Datastream could be
either first day closing price or IPO offer price. However this is not consistent across markets,
and that is why I expect to see a non-zero trading volume to start compounding returns. If
neither the first nor the second datapoint has positive volume, I deem the series as unreliable
and exclude it from the analysis. As a result, over a hundred companies, the majority of which
European, are left out. A manual inspection of the data shows that indeed the return series for
stocks with large trading volume gaps are often suspicious.
Unless otherwise noted, the reported descriptive statistics, tests and cross-sectional
regressions are run on variables which are trimmed at the lower and upper half percentile.
This doesn't apply to the calendar time portfolio regressions.
IV. Methodology
The main objective of this paper is to compare US and European VC-backed IPOs in
terms of their long-term performance, over a period of three and five years respectively. In
order to do that I employ a number of econometric techniques, including statistical tests and
regression analysis.
In my comparisons I use the returns of the MSCI World index as benchmark. I chose
this index since it has broad coverage of over 6000 stocks from 24 developed markets across
the world. Also the MSCI World is unrivaled in terms of its long series of historical returns.
In a set of regressions I use the Fama and French 3 global factors. Although the website of
Kenneth French also publishes return series for 25 global portfolios sorted on size and book-
to-market, the breakpoints are not published, as to allow benchmarking on these portfolios.
My first set of event time regressions tries to explain cross-sectional differences in

buy-and-hold abnormal returns between US and European VC-backed IPOs. Similar to Carter
et al. (1998), I construct a dependent variable which is the natural logarithm of, 1000 percent
plus the market-adjusted buy and hold return of the IPO for the examined time window. The
market-adjusted return is formed after subtracting the contemporaneous return on the MSCI
World index from the buy-and-hold IPO return. The compounding starts from the first day
close. First day return itself is not included, because IPO offer price data is not universally
available, and also the average investor rarely gets a chance to buy at that price.
As Lyon et al. (1999) comment, the handling of stocks that delist during the sample
period is not universal. In the BHAR regressions, if a firm delists prior to the respective three
or five-year period, similar to Barber and Lyon (1997) and Gompers and Lerner (2003) I fill
its time series with the returns of the benchmark in order to approximate a realistic investment
strategy. A limitation of my study is that the benchmark is not a matched firm or specific
portfolio, and as a result the spliced return would not matter much from an econometric point
of view when buy-and-hold abnormal returns are calculated.
Stocks that were listed from July 2007 to June 2009 have returns estimated for the
three-year horizon only. Since I examine total returns which account for dividends and other
capital events, I also use the total return series of the MSCI World. Because MSCI World
total returns are not available daily prior to 1999, I approximate the intermediate points using
the previous month's total return adjusted using the daily price return series. For time
windows of less than a month this procedure should be reasonably accurate. Although a
typical calendar year contains around 253 trading days, Datastream carries 261 datapoints for
each stock per year. I calculate three-year returns at the 780th datapoint, and five-year returns
at the 1300th datapoint. Some papers, (for example Brav and Gompers (1997)) calculate
BHAR by compounding monthly returns, but since for my sample period I have available a
continuous daily total return series for all companies, I am not concerned with intermediate
months.
I introduce a US dummy variable that takes a value of 1 if the IPO company comes
from the US, and 0 if the company is European. I also construct a coefficient that takes values
between 0 and 1, and is formed by the number of US venture capitalists that are backing a
particular IPO company, over the combined number of US and European VC backers. In the
rare cases where VentureXpert reports that no VCs from these regions participate in the IPO,
such ratio is not calculated. An inspection of the data shows that the percentage of VCs from
other parts of the world is negligible. The last variable of interest in this study is the total
number of VCs that participate in the IPO company, regardless of their origin.
In light of the results of cited studies (Hege et al. (2003) and Schwienbacher (2005)) I
would like to test the hypothesis that venture IPOs of US companies, and those backed by US
VC firms are associated with higher returns compared to European counterparts. Following an
argument for improved monitoring and endogenous selection bias, we can also expect that
IPOs with a greater number of VCs perform better.
I also include other control variables that have been used in the literature as factors
influencing IPO performance. I take the company book-to-market ratio at the time of IPO as
the ratio between the book value of equity over market capitalization. Due to limitations of
the international coverage of Datastream/Worldscope I proxy market capitalization of the
company by the market value of the particular share issue. This approach leaves out possible
other classes of shares, but should be a reasonable approximation for most IPO companies.
The same is applicable when I control for company size.
Age is another included variable that is suggested to proxy for the risk of an IPO
(Ritter (1984)). I also control for industry using a set of dummy variables based on 2-digit SIC
codes. Finally, I control for the IPO year, since studies (like Yung et al. (1997)) have shown
that observed IPO cycles are associated with differences in returns.
The general form of the three-year BHAR empirical model is presented in equation 1.
The five-year regression is analogous.
BHAR_3Y_log = b0 + b1*US_dummy + b2*US_VC_ratio + b3*VCs_involved + b4 *book_to_market +

b5 * size_log + b6 * age_log + (industry effects) + (year effects) + error
Cumulative abnormal returns (CAR) is a method alternative to buy-and-hold abnormal

returns. It is less frequently used in long horizon event studies. Although cumulative abnormal
returns are correlated with buy-and-hold abnormal returns, they are a biased estimate of
BHAR (Barber and Lyon (1997)). Nevertheless, cumulative or mean monthly abnormal
returns are sometimes used because they are less skewed and are favored over BHAR by
some researchers like Fama (1998), and Gompers and Lerner (2003).
For completeness I include CAR in my cross-sectional analysis. I calculate CAR by

summing abnormal returns on a daily basis until the end of the first calendar month after the
IPO, and from then on I sum abnormal returns for the remaining 35 or 59 months. My
approach is similar to Brav et al. (2000), with the difference being that the cited paper omits
the returns that took place between the listing date and the end of the first calendar month.
The next set of regressions is based on the calendar time portfolio approach as
advocated by Fama (1998) and a number of other researchers. The advantage of this technique
is that it takes into account the cross-sectional correlation between the returns of companies
that have IPOs over the same time window. Also unlike BHAR, a single month of
underperformance is not magnified by the force of repeated compounding. Each month during
the sample period I construct a portfolio consisting of the VC-backed IPOs that took place
over the investigated time window - the previous 36 and 60 months. I then regress the
monthly returns of that portfolio on the Fama and French (1993) three risk factors, calculated
on a global market basis. In addition, I add the three variables of interest - a US dummy, US
VC ratio and VCs involved. Since here the dependent variable is not individual stocks'
returns, the regressors express average values for the set of securities that are in the portfolio
for the particular month. The US dummy and the US VC ratio are value weighted on market
capitalization, VCs involved is equally weighted.
If a stock delists before the three or five-year mark, it is dropped from the portfolio for
the subsequent months. If the total return index of a stock hits zero, it gets dropped in a
similar fashion.
The general form of the three-year calendar time empirical model is presented in
equation 2. The five-year regression is analogous.
calendar_return-rf_3Y = b0 + b1*mkt-rf + b2*smb + b3*hml + b4*US_dummy_vw +

b5*US_VC_ratio_vw + b6*_Vcs_involved_mean + error
For each of the two time windows I run three regressions. The first is OLS where the
monthly portfolio returns equally weight the individual stocks. In the second instance the
monthly portfolios are value weighted using the stocks' market capitalization in the beginning
of the month. Thirdly I run a weighted least squares regression, where stocks' returns are
value weighted, and in turn the monthly portfolio returns are weighted based on the number of
stocks for that month. I use WLS as one possible solution to the heteroskedastisity problem,
as suggested by Lyon et al. (1999). This issue arises due to the changing number of stocks in
the portfolio month over month. Intuitively more weight goes to the points in which there is a
greater number of companies in the portfolio.
V. Empirical results
I first report side-to-side buy-and-hold returns and wealth relatives for the two
subsamples, as it is common place following the original IPO event studies by Ritter (1991)
and Loughran and Ritter (1995). There are two main patterns that can be observed in Table I:
both US and European IPOs underperform the benchmark, and while value weighting narrows
this gap for European stocks, it visibly exacerbates it for US companies. The overall
underperformance is mostly consistent with the results of Brav and Gompers (1997) who look
at VC-backed and non-VC-backed US IPOs, yet my study is limited to the use of only one
benchmark. The effect of value weighting is much different for my sample, showing that the
larger US IPOs underperformed relative to the smaller ones. These conflicting findings may
be influenced by the specific sample period that I investigate. Similar negative value effect is
documented by Gompers and learner (2003) for US IPOs listed from 1935 to 1972.
On the other side I document a much better performance for European IPOs when
company returns are value weighted. They fall only a couple percent short of the market, with
wealth relatives of 0.97 and 0.95 for the three and five years horizon, respectively. This means
that for European IPOs, underperformance is driven primarily by smaller issuers, which is in
line with the non-VC sample of Brav and Gompers (1997) and Loughran and Ritter (1995).
It should be noted that as it is established practice in previous studies, the benchmark

index is value weighted, what changes across panels in Table I is the time window and the
weighting of the individual IPOs.
The most up-to-date US IPO statistics of Ritter (2012) also document that equally
weighted VC-backed IPOs underperform the market on average by 12% over three years for
the period 1980-2011. The underperformance varies depending on the sub-period, but is most
acute during the dot-com bubble - which heavily influences the results of my sample.
In Table II I present descriptive statistics for a number of variables that I later use for
regression analysis. For most of them I trim the upper and lower half percentiles due to the
presence of outliers.
Unlike in Table I, now I calculate buy-and-hold abnormal returns by splicing in the

return of the benchmark in case the company delists prior to the 3 and 5 year anniversary. As
discussed, I do this in order to stay truthful to the idea of the BHAR approach, namely to
represent returns using a realistic and implementable investment strategy. The negative values
for BHARs are in line with the above-quoted research. The method of cumulative abnormal
returns is favored by fewer academics when it comes to long horizon event studies, but for
completeness I also calculate CARs for the respective time windows. The average CAR is
positive for US IPOs, but negative for European issues. Gompers and Lerner (2003) also
report that unlike BHAR measures, the values for cumulative abnormal returns are positive
for their sample of US pre-NASDAQ IPOs. In contrast Brav et al. (2000) do not document
much improvement in performance when CAR is used over BHAR.
The values for the variable US VC ratio are not surprising. It shows that US IPOs are
mainly backed by US venture capitalists, and that European companies are predominantly
backed by European VCs. Yet it is visible that US VCs have much greater presence in Europe
compared to European VCs in the United States. We can also see that the median venture IPO
in the US is backed by more VCs compared to Europe, 5 and 2 VCs respectively. Lerner
(1994) concludes that VCs prefer to syndicate their investment with other VCs, over investing
alone.
In the regression analysis I use a few control variables, which are also described. I
managed to obtain book value of equity for around three quarters of the sample companies,
from which I calculated book-to-market ratio. Naturally, I discarded negative values from the
analysis. The data shows that on book-to-market the US and European subsamples are nearly
identical. This is an important consideration that gives evidence for a similarity in the risk
profiles among IPO companies on the two sides of the Atlantic. Results are not the same when
it comes to firm size though, since the median IPO company in the US has market
capitalization that is more than 70% higher compared to the median European firm, $209m
and $120m respectively. The median age of European IPO companies is visibly greater
compared to US, 8.2 and 6.7 years respectively. This is consistent with previous studies
results, like the ones outlined by Ritter (2003). Overall the median age could be considered
somewhat below the long-term average, which Ritter (2012) reports to have bottomed around
the dot-com bubble - reaching 4 years for the US, on the backdrop of 8 years for the whole
1980-2011 period. Generally, the literature suggests that firms with shorter history are more
risky due to a greater problem of asymmetric information, something that is supposedly
mitigated by the presence of outside venture investors.
Following the approach of Carter et al. (1998) I proceed with looking into the data
from a statistical angle, by comparing the mean values of variables between the two
subsamples. First, in Table III I run a median-centered version of the Levene's test for equal
variance, which is well suited for skewed data. Apart from book-to-market and firm size, all
other variables have significant difference in variance. I use this information when choosing
the appropriate T-test at the next step.
In table IV I run parametric and non-parametric tests for equal means. In Panel A I
present results using a standard T-test that takes into account the difference in variance. The
P-values show a lack of significant difference between the mean long-term buy-and-hold
abnormal returns of US and European VC-backed IPOs. When it comes to CARs, the test
points to a clear excess of US returns over European ones. In addition, with great certainty it
could be claimed that US IPO portfolio companies are backed by a greater number of VCs,
and are more mature.
In Panel B I show the results of an application of the Kruskal-Wallis equality-of-

populations rank test. This technique is appropriate because it is robust to non-normality in
data, which is typical for the distribution of long-term BHARs. Further, the test is suitable for
subsamples of unequal size. The results do not quite match with the parametric test, and show
that both three- and five-year BHARs significantly differ between US and European
companies. Also the mean of all other variables with the exception of book-to-market are
reported to differ in the two populations.
Next I run a cross-sectional regression on buy-and-hold abnormal returns and include

regressors that account for the origin of the IPO company and the origin of the VCs that are
backing it. In order to alleviate the problem of high skewness I construct my dependent
variable similarly to Carter et al. (1998), as the natural logarithm of, 1000 percent + the
market-adjusted buy-and-hold return of the stock. In Table V I list the results of different
specifications for the three- and five-year BHARs. The first three specifications are univariate
regressions using the three variables that concern company origin and VC-backing. The rest
of the regressions include combinations of these variables and other controls that describe the
particular IPO.
Results do not show company origin or VC origin to have an influence on long-term

buy-and-hold abnormal returns. The US dummy and VC ratio show some significance in only
one of the five-year specifications. I observe a significant negative association between IPO
returns and the number of VC backers. This result is open to different interpretations. It could
be that the best companies require fewer rounds of financing and fewer investors for that
matter, or it could be that the best VCs choose to syndicate their investments with fewer other
VCs. A more interesting hypothesis would be if the presence of more VCs negatively impacts
entrepreneurial initiative as suggested by Burkart et al. (1997). In line with the results of Brav
and Gompers (1997) and the general consensus in the literature, I observe significantly better
performance for companies that have higher book-to-market ratio at date of listing and which
are larger in terms of market capitalization. Company age does not come up significant in my
sample.
Table VI reports cross-sectional regressions where the dependent variable is the three-
and five-year cumulative abnormal return. US dummy comes up highly significant and robust
to controls, and shows that CARs of US IPOs are 30 to 60 percentage points over those of
European issues, and that the discrepancy increases with time. The origin of the VC also
possesses statistical power, but only when US dummy is not included. The VCs involved is
mostly insignificant in these regressions. Oddly company size also loses its significance when
CARs are used.
Since a major criticism to the use of event time returns is that they don't account for
the presence of cross-sectional correlation between contemporaneous events, I also run
regressions in the framework of calendar time portfolio returns. In Tables VII and VIII I
regress the monthly returns of a portfolio of VC-backed IPO companies on the Fama French
three global factors along my variables of interest. Since now I am working with portfolio
returns instead of individual stocks, I transform the variables into time series of means, which
average the respective values across the pool of companies in the portfolio for a given month.
US dummy and US VC ratio are taken as a value weighted average based on the current
market capitalization of the individual companies, VCs involved is taken as a simple mean. In
the first panel of the two tables the regression is ordinary least squares with individual
company's returns weighted equally in the portfolio. Panel B lists results of OLS with value
weighted returns based on the firms' market capitalization at the beginning of each month. In
Panel C I present results of weighted least squares regressions, which use value weighted
company returns and which weigh each portfolio return proportionally to the number of
stocks in it. This is reasonable consideration given that during some of the 246 months, there
are few stocks in the portfolio.
For the three-year horizon (Table VII) US VC ratio VW) appears quite significant and
with positive sign across different specification and methods used. A rough interpretation of
the data shows that when returns are value weighted the expected monthly return on stocks
backed exclusively by US VCs is two standard deviations above the expected return of stocks
backed by European VCs only, even after controlling for company origin (mean monthly
portfolio return is 0.020 with a standard deviation of 0.070). US dummy comes up positive
and significant in the WLS specification, but it is not robust in OLS and even changes its sign
in column 5 of Panel A. the coefficient on the number of VCs involved comes up negative
and statistically significant when returns are value weighted.
Table VIII gives the respective calendar time results for the five-year horizon. Here
company and VC origin do not appear to explain a clear difference in returns. The two
variables come up significant in OLS with value weighted returns, but lose significance when
both are put in the model at the same time. The number of VCs involved comes up negative
and significant in the WLS specifications.
In regard to market efficiency, in each panel of Tables VII and VIII I have included a
specification that uses the Fama French 3 factor model without the other variables. The
loadings on the factors look normal, but the intercepts are very suspicious. Simply they are
extremely large. Even without looking at studies like Brav and Gompers (1997) and Brav et
al. (2000), one can conclude that values in the range of 1% to 2% on a monthly basis are not
acceptable for an asset pricing model. It should be taken into account that my study uses
international data and the global version of the Fama French three factors, but the
misspecification of the model is nevertheless evident. Results do not change if I include the
Carhart (1997) momentum factor. The online data library of Prof. Kenneth French does not
provide much information regarding the construction of the global factors. What is mentioned
is a list of 23 developed markets that are used in the factor formation.1
Another important aspect to results interpretation is the accounting for the possible
endogeneity problem when considering the effects of the involvement of a VC from the other
region. This is because the sample of companies that received financing from the opposite
1
The global factors cover: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Switzerland,
Sweden, United Kingdom, United States.
side of the Atlantic is non-random, and we can expect that these businesses are qualitatively
different from their peers. The unobserved characteristics expose the analysis to an omitted
variable problem which leads to a selection bias if we treat this sample of companies as
random (see Heckman 1979).
At this stage the coefficients on US VC ratio do not distinguish between VCs' two
main abilities: (i) to screen good companies and (ii) to provide support and bring expertise to
the management of the business. In order to disentangle these two effects, a hazard model
should be built, which estimates the probability that a particular company gets backing from a
VC from the other region. This should be based on company characteristics, which can
describe its relative attractiveness to venture capitalists. Some variables that have been used in
the literature include company revenues, R&D expenditure, R&D employees, industry,
number of patents, university affiliation, geographic location et cetera (see Hsu (2004), Baum
and Silverman (2004), Engel (2002)).
Once these characteristics are accounted for, the selection bias can be corrected using
for example Heckman's (1979) two stage regression. Since these variables need to be
measured at the phase when the company is still private and receiving financing, the current
dataset would have to be supplemented in order to perform such econometric procedure. At
this point I limit my analysis to the available data, and thus am unable to make statements
regarding the influence US and European VCs have on their portfolio companies.
VI. Conclusion and further research
This paper compares the long-term performance of US and European venture-backed

IPO companies over a period of three and five years. In my analysis I distinguish the two
regions by the geographic origin of the IPO company and the origin of the venture capitalists
that participate in the issue. When buy-and-hold returns are used, I do not find significant
difference in performance between US and European ventures. At the same time cumulative
abnormal returns suggest that companies based in the US outperform their peers on the other
side of the Atlantic. Calendar time portfolio analysis shows that over three years European
IPOs, and those backed by European VCS tend to underperform. The same does not hold over
five years. Furthermore, I observe that the number of VCs backing an issue is negatively
related to its performance.
These results could be of interest to institutional investors that allocate funds to

venture capital in an international setting, as far as successful IPOs are a large contributor to
VC returns. Also this information could be used by agents that invest in IPO companies at the
secondary market. Last, this study provides some indication to European policy makers, for
the relative state and effectiveness of the mechanisms for the financing of innovative
businesses.
The current study comes with its limitations. There are areas for possible further
research and improvement. Performance measurement could be better calibrated by the use of
size and book-to-market portfolios as more precise benchmarks. These should be formed from
a universe of stocks that covers both US and Europe. The accounting for venture capitalist
origin would ideally distinguish not just the act of participation, but also the value of money
invested by a VC from a given region. Further, the analysis could be improved by the
correction for the selection bias that exist, namely that companies that receive financing from
overseas are likely qualitatively different from their peers. In addition, the used three factor
model should also be better calibrated for the investigated universe of stocks.
Table I
Average Raw Buy-and-Hold Returns Calculated for the US and European Subsamples and the MSCI
World Index
Mean percent of compounded buy-and-hold returns and wealth relatives for a sample of 1488 US and 386
European VC-backed IPOs that took place between January 1992 and June 2009. The stocks with the top and
bottom half percentile of returns are pre-excluded. Three and five-year returns are calculated as the stock's total
return at 3(5) years post-IPO in respect to the first day closing price. In case the security delists prior to either of
the two dates, the return is calculated up to the last available day. The MSCI World index is used as benchmark,
and its return is estimated for the respective time period. Since MSCI World total return series is not available on
a daily basis before 1999, intermediate points are approximated using the latest monthly total return corrected
with the daily series for the price return index. Wealth relatives are calculated following Loughran and Ritter
(1995) as the mean gross return of the benchmark over the mean gross return of the IPOs. Value weighted
calculations are using the stock's market capitalization at the close of first day of trading.
MSCI Wealth
IPOs
World relative
Panel A. 3-Year Equally Weighted Returns
US 12.3 22.3 0.92
Europe -12.4 2.1 0.86
Panel B. 3-Year Value Weighted Returns
US -27.8 2.1 0.71
Europe -13.1 -10.4 0.97
Panel C. 5-Year Equally Weighted Returns
US 28.4 37.1 0.94
Europe -8.3 11.5 0.82
Panel D. 3-Year Value Weighted Returns
US -22.1 16.6 0.67
Europe 2.3 7.6 0.95
Table II
Descriptive Statistics of Variables for the US and European Subsamples
A summary of variables for a sample of US and European VC-backed IPOs that took place between January
1992 and June 2009. All variables are trimmed at the upper and lower half percentile (with the exception of US
VC ratio). BHAR 3Y and BHAR 5Y are respectively percent of compounded three and five-year buy-and-hold
abnormal returns over the MSCI World total return index without rebalancing. In case the security delists prior
to either of the two dates, the rest of the series is filled using the return of the benchmark. Since MSCI World
total return series is not available on a daily basis before 1999, intermediate points are approximated using the
latest monthly total return corrected with the daily series for the price return index. CAR 3y and CAR 5y are
cumulative abnormal IPO returns over the contemporaneous return of the MSCI World index for a period of 36
and 60 months respectively. In case the security delists prior to the end of this time window, CARs are taken to
the last available point. US VC ratio is a coefficient taking values between 0 and 1, formed by the number of US
VCs backing a particular IPO, over the total number of US and European VCs that participate in the company.
VCs involved is an integer that corresponds to the total number of venture capitalist firms that have financed the
company (this counts VCs from all world regions). Book-to-market is a ratio between the company's book value
of common equity over market capitalization at the close of first day of trading (Note: this excludes other classes
of shares due to data availability). Negative values of book-to-market are excluded. Size is the security market
capitalization (millions of US dollars) at the close of first day of trading. Age is the number of years since the
founding of the company at the time of the IPO.
N mean Median SD
Panel A. US subsample
BHAR 3Y (%) 1488 -9.59 -52.86 149.14
BHAR 5Y (%) 1431 -10.75 -71.01 204.68
CAR 3Y (%) 1489 10.12 13.97 127.78
CAR 5Y (%) 1489 48.92 47.93 170.08
US VC ratio 1506 0.96 1.00 0.12
VCs involved 1503 6.55 5.00 4.86
Book-to-market 1144 0.41 0.28 0.45
Size ($ mil.) 1487 460.81 208.62 843.70
Age (years) 1434 9.38 6.63 10.08
Panel B. European subsample
BHAR 3Y (%) 386 -14.42 -40.45 96.19
BHAR 5Y (%) 363 -20.15 -58.99 120.04
CAR 3Y (%) 385 -15.25 -8.09 104.15
CAR 5Y (%) 385 -11.40 2.37 137.41
US VC ratio 508 0.16 0.00 0.31
VCs involved 506 3.26 2.00 3.19
Book-to-market 351 0.41 0.31 0.38
Size ($ mil.) 380 361.94 119.90 824.67
Age (years) 438 12.47 8.16 13.46
Table II (Continued)
N mean Median SD
Panel C. Full Sample
BHAR 3Y (%) 1874 -10.58 -49.30 139.87
BHAR 5Y (%) 1794 -12.65 -67.91 190.62
CAR 3Y (%) 1874 4.90 6.92 123.69
CAR 5Y (%) 1874 36.53 37.24 165.67
US VC ratio 2014 0.76 1.00 0.39
VCs involved 2009 5.72 4.00 4.72
Book-to-market 1495 0.41 0.29 0.43
Size ($ mil.) 1867 440.69 190.39 840.59
Age (years) 1872 10.10 7.04 11.04
Table III
Test for Difference of Variance Between the US and European Subsamples Using a Median-Centered
Application of Levene's Test
An application of Levene's (1960) test for equality of variances using a median-centered approach as suggested
by Brown and Forsythe (1974). The variables cover a sample of US and European VC-backed IPOs that took
place between January 1992 and June 2009. All variables are trimmed at the upper and lower half percentile
(with the exception of US VC ratio). BHAR 3Y and BHAR 5Y are respectively percent of compounded three
and five-year buy-and-hold abnormal returns over the MSCI World total return index without rebalancing. In
case the security delists prior to either of the two dates, the rest of the series is filled using the return of the
benchmark. Since MSCI World total return series is not available on a daily basis before 1999, intermediate
points are approximated using the latest monthly total return corrected with the daily series for the price return
index. CAR 3y and CAR 5y are cumulative abnormal IPO returns over the contemporaneous return of the MSCI
World index for a period of 36 and 60 months respectively. In case the security delists prior to the end of this
time window, returns are taken to the last available point. US VC ratio is a coefficient taking values between 0
and 1, formed by the number of US VCs backing a particular IPO, over the total number of US and European
VCs that participate in the company. VCs involved is an integer that corresponds to the total number of venture
capitalist firms that have financed the company (this counts VCs from all world regions). Book-to-market is a
ratio between the company's book value of common equity over market capitalization at the close of first day of
trading (Note: this excludes other classes of shares due to data availability). Negative values of book-to-market
are excluded. Size is the security market capitalization (thousands of US dollars) at the close of first day of
trading. Age is the number of years since the founding of the company at the time of the IPO.
F-stat P-value
BHAR 3Y 17.77 0.000
BHAR 5Y 12.43 0.000
CAR 3Y 20.29 0.000
CAR 5Y 11.20 0.000
US VC ratio 180.1 0.000
VCs involved 111.2 0.000
Book-to-market 0.831 0.362
Size 1.273 0.259
Age 22.28 0.000
Table IV
Tests for Difference in Means Between the US and European Subsamples
Tests for equality of means for variables covering a sample of US and European VC-backed IPOs, which took
place between January 1992 and June 2009. Panel A lists T-Tests results assuming unequal variances in all
variables (with the exception of Book-to-market and Size). Panel B lists results of Kruskal-Wallis equality-of-
populations rank test. Reported are P-values. All variables are trimmed at the upper and lower half percentile
(with the exception of US VC ratio). BHAR 3Y and BHAR 5Y are respectively percent of compounded three
and five-year buy-and-hold abnormal returns over the MSCI World total return index without rebalancing. In
case the security delists prior to either of the two dates, the rest of the series is filled using the return of the
benchmark. Since MSCI World total return series is not available on a daily basis before 1999, intermediate
points are approximated using the latest monthly total return corrected with the daily series for the price return
index. CAR 3y and CAR 5y are cumulative abnormal IPO returns over the contemporaneous return of the MSCI
World index for a period of 36 and 60 months respectively. In case the security delists prior to the end of this
time window, returns are taken to the last available point. US VC ratio is a coefficient taking values between 0
and 1, formed by the number of US VCs backing a particular IPO, over the total number of US and European
VCs that participate in the company. VCs involved is an integer that corresponds to the total number of venture
capitalist firms that have financed the company (this counts VCs from all world regions). Book-to-market is a
ratio between the company's book value of common equity over market capitalization at the close of first day of
trading (Note: this excludes other classes of shares due to data availability). Negative values of book-to-market
are excluded. Size is the security market capitalization (thousands of US dollars) at the close of first day of
trading. Age is the number of years since the founding of the company at the time of the IPO.
Panel A. T-Test
BHAR 3Y 0.219 0.438 0.781
BHAR 5Y 0.129 0.258 0.871
CAR 3Y 0.000 0.000 1.000
CAR 5Y 0.000 0.000 1.000
US VC ratio 0.000 0.000 1.000
VCs involved 0.000 0.000 1.000
Book-to-market 0.545 0.909 0.455
Size 0.020 0.041 0.980
Age 1.000 0.000 0.000
Panel B. Kruskal-Wallis Test
BHAR 3Y 0.000
BHAR 5Y 0.002
CAR 3Y 0.000
CAR 5Y 0.000
US VC ratio 0.000
VCs involved 0.000
Book-to-market 0.072
Size 0.000
Age 0.000
Table V
Cross-Sectional Regression of 3- and 5-Year IPO Buy-and-Hold Abnormal Returns Accounting for
Company and VC Origin.
A cross-sectional regression of three- and five-year buy-and-hold abnormal returns for a sample of US and
European VC-backed IPOs that took place between January 1992 and June 2009. The dependent variable is
formed similarly to Carter et al. (1998) as the natural logarithm of, 1000% + the percent of the market-adjusted
IPO buy-and-hold return for the respective time window following the listing date. The market-adjusted return is
the return on the IPO minus the total return of the MSCI World index. In case the security delists prior to the
third or fifth anniversary the rest of the series is filled using the return of the benchmark. Since MSCI World
total return series is not available on a daily basis before 1999, intermediate points are approximated using the
latest monthly total return corrected with the daily series for the price return index. US dummy is a variable
taking a value of 1 if the IPO company is from the US, or 0 if it is from Europe. US VC ratio is a coefficient
taking values between 0 and 1, formed by the number of US VCs backing a particular IPO, over the total number
of US and European VCs that participate in the company. VCs involved (log) is the natural logarithm of the total
number of venture capitalist firms that have financed the company (this counts VCs from all world regions).
Book-to-market is a ratio between the company's book value of common equity over market capitalization at the
close of first day of trading (Note: this excludes other classes of shares due to data availability). Negative values
of book-to-market are excluded. Size (log) is the natural logarithm of the security's market capitalization
(thousands of US dollars) at the close of first day of trading. Age (log) is the natural logarithm of, 1 + the
number of years since the founding of the company at the time of the IPO. Industry dummies and IPO year
dummies are sets of variables that account for the 2-digit SIC code of the company and the year of its IPO,
respectively. The dependent variable and the regressors are trimmed at the upper and lower half percentile (with
the exception of US dummy, US VC ratio and the two dummy sets). T-statistics are shown in parentheses.
Significance at the 10, 5, and 1 percent levels is denoted by 1, 2, and 3 asterisks, respectively.
(table on the next page)

Table V (Continued)
Long-Run Performance of VC-Backed IPOs: US & Europe

Panel A. Three-year buy-and-hold abnormal returns
1 2 3 4 5 6 7 8 9
US dummy -0.000 -0.002 0.010 0.000 0.016
(0.04) (0.11) (1.17) (0.01) (0.93)
US VC ratio -0.001 0.000 0.006 -0.010 -0.025
(0.15) (0.02) (0.61) (0.91) (1.28)
VCs involved (log) -0.010 -0.008 -0.006 -0.006 -0.004 -0.004
(3.22)*** (2.02)** (1.37) (1.60) (0.89) (1.01)
Book-to-market 0.081 0.075 0.081 0.075 0.075
(10.33)*** (9.28)*** (10.50)*** (9.43)*** (9.38)***
Size (log) 0.007 0.013 0.007 0.014 0.014
(2.30)** (3.90)*** (2.51)** (4.23)*** (4.14)***
Age (log) 0.002 0.004 0.003 0.005 0.005
(0.62) (0.93) (0.70) (1.13) (1.16)
Industry dummies Yes Yes Yes
IPO year dummies Yes Yes Yes
Intercept 2.284 2.284 2.298 2.284 2.174 2.261 2.167 2.260 2.261
(373.95)*** (345.45)*** (434.36)*** (345.04)*** (59.63)*** (32.92)*** (60.04)*** (33.44)*** (33.45)***
Adj. R-squared 0.001 0.001 0.005 0.001 0.078 0.139 0.079 0.146 0.146
N 1874 1860 1855 1860 1352 1352 1340 1340 1340
26
Table V (Continued)

Panel B. Five-year buy-and-hold abnormal returns
1 2 3 4 5 6 7 8 9
US dummy 0.000 -0.017 0.023 0.013 0.024
(0.04) (0.93) (2.09)** (1.03) (1.05)
US VC ratio 0.005 0.021 0.022 0.007 -0.015
(0.45) (1.03) (1.83)* (0.47) (0.61)
VCs involved (log) -0.015 -0.016 -0.013 -0.015 -0.011 -0.012
(3.68)*** (2.98)*** (2.34)** (2.77)*** (2.03)** (2.16)**
Book-to-market 0.077 0.070 0.077 0.070 0.070
(7.60)*** (6.60)*** (7.62)*** (6.63)*** (6.58)***
Size (log) 0.007 0.015 0.008 0.016 0.016
(1.95)* (3.51)*** (1.98)** (3.64)*** (3.55)***
Age (log) 0.002 0.003 0.002 0.003 0.003
(0.44) (0.51) (0.37) (0.53) (0.56)
Intercept 2.276 2.272 2.298 2.273 2.163 2.357 2.161 2.360 2.362
(281.86)*** (256.74)*** (333.61)*** (256.54)*** (45.58)*** (26.45)*** (45.44)*** (26.54)*** (26.55)***
Adj. R-squared 0.001 0.001 0.007 0.001 0.052 0.093 0.051 0.095 0.095
N 1794 1780 1777 1780 1290 1290 1278 1278 1278
27
Table VI
Cross-Sectional Regression of 3- and 5-Year IPO Cumulative Abnormal Returns Accounting for
Company and VC Origin.
A cross-sectional regression of three- and five-year cumulative abnormal returns for a sample of US and
European VC-backed IPOs that took place between January 1992 and June 2009. The dependent variable is the
sum of abnormal IPO returns over the contemporaneous return of the MSCI World index. Abnormal returns are
calculated on a daily basis until the end of the first calendar month after the listing date, then on a monthly basis
for a period of 35 or 59 months. In case the security delists prior to the end of this time window, returns are taken
to the last available point. Since MSCI World total return series is not available on a daily basis before 1999,
intermediate points are approximated using the latest monthly total return corrected with the daily series for the
price return index. US dummy is a variable taking a value of 1 if the IPO company is from the US, or 0 if it is
from Europe. US VC ratio is a coefficient taking values between 0 and 1, formed by the number of US VCs
backing a particular IPO, over the total number of US and European VCs that participate in the company. VCs
involved (log) is the natural logarithm of the total number of venture capitalist firms that have financed the
company (this counts VCs from all world regions). Book-to-market is a ratio between the company's book value
of common equity over market capitalization at the close of first day of trading (Note: this excludes other classes
of shares due to data availability). Negative values of book-to-market are excluded. Size (log) is the natural
logarithm of the security's market capitalization (thousands of US dollars) at the close of first day of trading. Age
(log) is the natural logarithm of, 1 + the number of years since the founding of the company at the time of the
IPO. Industry dummies and IPO year dummies are sets of variables that account for the 2-digit SIC code of the
company and the year of its IPO, respectively. The dependent variable and the regressors are trimmed at the
upper and lower half percentile (with the exception of US dummy, US VC ratio and the two dummy sets). T-
statistics are shown in parentheses. Significance at the 10, 5, and 1 percent levels is denoted by 1, 2, and 3
asterisks, respectively.
(Table on the next page)

Table VI (Continued)

Panel A. Three-year cumulative abnormal returns
1 2 3 4 5 6 7 8 9
US dummy 0.254 0.223 0.355 0.307 0.437
(3.60)*** (1.55) (4.21)*** (3.08)*** (2.46)**
US VC ratio 0.242 0.026 0.308 0.208 -0.189
(3.10)*** (0.17) (3.32)*** (1.90)* (0.97)
VCs involved (log) -0.009 -0.002 -0.008 0.016 0.011 -0.005
(0.28) (0.05) (0.18) (0.39) (0.25) (0.11)
Book-to-market 0.559 0.533 0.565 0.538 0.529
(7.15)*** (6.44)*** (7.24)*** (6.53)*** (6.44)***
Size (log) 0.000 0.027 0.004 0.042 0.035
(0.01) (0.79) (0.14) (1.23) (1.04)
Age (log) -0.010 0.007 -0.015 0.003 0.007
(0.26) (0.16) (0.40) (0.07) (0.17)
Intercept -0.152 -0.145 0.059 -0.150 -0.367 0.082 -0.398 0.012 0.048
(2.43)** (2.11)** (1.08) (2.18)** (1.01) (0.12) (1.10) (0.02) (0.07)
Adj. R-squared 0.006 0.005 0.001 0.005 0.050 0.086 0.045 0.083 0.087
N 1874 1860 1855 1860 1357 1357 1345 1345 1345
29
Table VI (Continued)

Panel B. Five-year cumulative abnormal returns
1 2 3 4 5 6 7 8 9
US dummy 0.603 0.378 0.772 0.623 0.622
(6.44)*** (1.97)** (7.00)*** (4.72)*** (2.63)***
US VC ratio 0.638 0.273 0.768 0.553 -0.012
(6.15)*** (1.29) (6.29)*** (3.80)*** (0.05)
VCs involved (log) 0.093 0.051 0.045 0.074 0.063 0.041
(2.13)** (0.96) (0.79) (1.40) (1.10) (0.72)
Book-to-market 0.371 0.420 0.377 0.430 0.417
(3.65)*** (3.90)*** (3.71)*** (3.98)*** (3.87)***
Size (log) -0.043 -0.025 -0.043 -0.011 -0.020
(1.13) (0.55) (1.12) (0.24) (0.44)
Age (log) -0.057 0.003 -0.066 -0.003 0.002
(1.13) (0.06) (1.31) (0.06) (0.04)
Intercept -0.114 -0.148 0.231 -0.156 0.282 -0.441 0.262 -0.507 -0.456
(1.37) (1.62) (3.15)*** (1.70)* (0.59) (0.48) (0.55) (0.55) (0.50)
Adj. R-squared 0.021 0.019 0.002 0.021 0.051 0.075 0.045 0.068 0.072
N 1874 1861 1855 1861 1359 1359 1347 1347 1347
30
Table VII
Time Series Regression of 3-Year Calendar Time Portfolio Returns Accounting for Company and VC
Origin, Employing the Fama-French 3-Factor Model.
A regression of the monthly returns of a portfolio containing stocks from a sample of 1887 US and European
VC-backed IPOs that took place between January 1992 and June 2009. Each month a portfolio is formed that
includes the stocks of companies that underwent an IPO in the past three years. The dependent variable is the
series of 246 monthly returns obtained for this portfolio. The control variables include the Fama and French
(1993) 3 risk factors calculated on a global basis covering 23 developed markets. Mkt-RF is the return of a broad
equity portfolio minus the risk free rate. SMB is the return of an investment strategy that is long in small stocks
and short in big stocks. HML is the return of an investment strategy that is long in high book-to-market stocks
and short in low book-to-market stocks. US dummy (VW) is the market weighted mean for a US dummy which
takes the value of 1 if a stock in the portfolio is from the US, and 0 if the stock is from Europe. US VC ratio
(VW) is the market weighted mean for a coefficient that takes values between 0 and one, formed by the number
of US VCs backing a particular IPO stock, over the total number of US and European VCs that participate in the
company. VCs involved (mean) is the arithmetic average of the total number of venture capitalist firms that have
financed a particular company in the portfolio (this counts VCs from all world regions).
Panel A displays the results of OLS regressions where the returns of individual stocks are weighted equally.
Panel B displays the results of OLS regressions where the returns of individual stocks are value weighted. Panel
C displays the results of weighted least squares regressions, where the returns of individual stocks are value
weighted, and monthly portfolio returns are weighted using the natural logarithm of the number of stocks in the
portfolio. T-statistics are shown in parentheses. Significance at the 10, 5, and 1 percent levels is denoted by 1, 2,
and 3 asterisks, respectively.

Table VII (Continued)

Panel A. OLS of Equally Weighted Monthly Portfolio Returns
1 2 3 4 5
Mkt-RF 1.294 1.295 1.291 1.291 1.282
(19.98)*** (19.94)*** (19.98)*** (19.86)*** (20.02)***
SMB 1.322 1.321 1.321 1.341 1.335
(9.79)*** (9.76)*** (9.82)*** (9.70)*** (9.82)***
HML -1.434 -1.434 -1.447 -1.415 -1.427
(11.92)*** (11.89)*** (12.03)*** (11.42)*** (11.70)***
US dummy (VW) -0.002 -0.046
(0.23) (2.77)***
US VC ratio (VW) 0.060 0.205
(1.59) (3.21)***
VCs involved (mean) -0.004 -0.007
(0.67) (1.27)
Intercept 0.008 0.009 -0.044 0.030 -0.107
(2.85)*** (1.65)* (1.33) (0.92) (1.97)**
Adj. R-squared 0.759 0.758 0.761 0.759 0.767
N 246 246 246 246 246
Panel B. OLS of Value Weighted Monthly Portfolio Returns
1 2 3 4 5
Mkt-RF 0.682 0.678 0.672 0.673 0.663
(10.27)*** (10.54)*** (10.52)*** (10.16)*** (10.41)***
SMB 0.664 0.684 0.663 0.719 0.727
(4.81)*** (5.10)*** (4.98)*** (5.11)*** (5.37)***
HML -1.394 -1.405 -1.428 -1.339 -1.367
(11.31)*** (11.77)*** (12.02)*** (10.62)*** (11.26)***
US dummy (VW) 0.040 0.008
(4.11)*** (0.46)
US VC ratio (VW) 0.168 0.148
(4.51)*** (2.34)**
(1.86)* (2.07)**
Intercept 0.023 0.003 -0.124 0.084 -0.044
(7.69)*** (0.53) (3.79)*** (2.54)** (0.81)
Adj. R-squared 0.567 0.593 0.599 0.571 0.604
N 246 246 246 246 246
Panel C. WLS of Value Weighted Monthly Portfolio Returns accounting for the Number of
Securities
1 2 3 4 5
Mkt-RF 0.623 0.469 0.586 0.527 0.365
(9.54)*** (8.54)*** (9.47)*** (8.56)*** (7.65)***
SMB 0.630 0.506 0.608 0.704 0.687
(4.42)*** (3.56)*** (4.38)*** (4.76)*** (4.72)***
HML -1.392 -1.424 -1.440 -1.289 -1.324
(10.90)*** (11.01)*** (11.49)*** (9.65)*** (10.19)***
US dummy (VW) 0.033 0.017
(4.21)*** (2.09)**
US VC ratio (VW) 0.165 0.126
(4.45)*** (2.83)***
(2.84)*** (4.12)***
Intercept 0.021 0.004 -0.125 0.101 0.011
(6.99)*** (1.14) (3.82)*** (3.46)*** (0.26)
Adj. R-squared 0.527 0.485 0.543 0.498 0.503
N 246 246 246 246 246
Table VIII
Time Series Regression of 5-Year Calendar Time Portfolio Returns Accounting for Company and VC
Origin, Employing the Fama-French 3-Factor Model.
A regression of the monthly returns of a portfolio containing stocks from a sample of 1887 US and European
VC-backed IPOs that took place between January 1992 and June 2009. Each month a portfolio is formed that
includes the stocks of companies that underwent an IPO in the past five years. The dependent variable is the
series of 246 monthly returns obtained for this portfolio. The control variables include the Fama and French
(1993) 3 risk factors calculated on a global basis covering 23 developed markets. Mkt-RF is the return of a broad
equity portfolio minus the risk free rate. SMB is the return of an investment strategy that is long in small stocks
and short in big stocks. HML is the return of an investment strategy that is long in high book-to-market stocks
and short in low book-to-market stocks. US dummy (VW) is the market weighted mean for a US dummy which
takes the value of 1 if a stock in the portfolio is from the US, and 0 if the stock is from Europe. US VC ratio
(VW) is the market weighted mean for a coefficient that takes values between 0 and one, formed by the number
of US VCs backing a particular IPO stock, over the total number of US and European VCs that participate in the
company. VCs involved (mean) is the arithmetic average of the total number of venture capitalist firms that have
financed a particular company in the portfolio (this counts VCs from all world regions).
Panel A displays the results of OLS regressions where the returns of individual stocks are weighted equally.
Panel B displays the results of OLS regressions where the returns of individual stocks are value weighted. Panel
C displays the results of weighted least squares regressions, where the returns of individual stocks are value
weighted, and monthly portfolio returns are weighted using the natural logarithm of the number of stocks in the
portfolio. T-statistics are shown in parentheses. Significance at the 10, 5, and 1 percent levels is denoted by 1, 2,
and 3 asterisks, respectively.

Table VIII (Continued)

Panel A. OLS of Equally Weighted Monthly Portfolio Returns
1 2 3 4 5
Mkt-RF 1.321 1.319 1.319 1.320 1.318
(20.09)*** (20.11)*** (20.09)*** (19.97)*** (19.94)***
SMB 1.337 1.343 1.339 1.346 1.352
(9.76)*** (9.83)*** (9.79)*** (9.58)*** (9.63)***
HML -1.311 -1.325 -1.320 -1.303 -1.317
(10.73)*** (10.85)*** (10.81)*** (10.37)*** (10.43)***
US dummy (VW) 0.025 0.029
(1.57) (0.62)
US VC ratio (VW) 0.054 -0.009
(1.42) (0.09)
(0.28) (0.29)
Intercept 0.010 -0.010 -0.037 0.019 0.005
(3.29)*** (0.76) (1.12) (0.58) (0.08)
Adj. R-squared 0.750 0.752 0.751 0.749 0.750
N 246 246 246 246 246
Panel B. OLS of Value Weighted Monthly Portfolio Returns
1 2 3 4 5
Mkt-RF 1.366 1.361 1.360 1.363 1.358
(17.50)*** (17.80)*** (17.72)*** (17.39)*** (17.64)***
SMB 0.950 0.965 0.953 0.968 0.985
(5.84)*** (6.06)*** (5.96)*** (5.81)*** (6.02)***
HML -1.901 -1.935 -1.922 -1.884 -1.918
(13.11)*** (13.59)*** (13.46)*** (12.63)*** (13.03)***
US dummy (VW) 0.063 0.070
(3.37)*** (1.30)
US VC ratio (VW) 0.136 -0.018
(3.07)*** (0.14)
(0.52) (0.53)
Intercept 0.034 -0.015 -0.086 0.054 0.016
(9.53)*** (1.02) (2.20)** (1.37) (0.20)
Adj. R-squared 0.719 0.730 0.728 0.718 0.728
N 246 246 246 246 246
Panel C. WLS of Value Weighted Monthly Portfolio Returns accounting for the Number of
Securities
1 2 3 4 5
Mkt-RF 1.337 1.314 1.313 1.171 1.224
(15.15)*** (15.40)*** (15.69)*** (14.02)*** (14.53)***
SMB 0.292 0.598 0.600 1.065 1.090
(1.88)* (3.98)*** (4.67)*** (5.79)*** (5.78)***
HML -2.632 -2.386 -2.344 -2.110 -2.101
(14.96)*** (14.08)*** (14.81)*** (11.57)*** (11.57)***
US dummy (VW) -0.003 0.056
(0.14) (1.07)
US VC ratio (VW) 0.004 -0.065
(0.10) (0.53)
(7.45)*** (5.43)***
Intercept 0.016 0.024 0.021 0.157 0.148
(4.45)*** (1.56) (0.53) (8.05)*** (2.02)**
Adj. R-squared 0.710 0.693 0.719 0.779 0.726
N 246 246 246 246 246
References
Aghion, P., Bolton, P. (1992). “An incomplete contracts approach to financial contracting”. Review
of Economic Studies 59, 473-494.
Amit, R., Brander, J., Zott, C. (1998). “Why do venture capital firms exist? Theory and Canadian
evidence”. Journal of Business Venturing 13, 441-66.
Ball, E., Chiu, H., Smith, R. (2011). “Can VCs time the market? An analysis of exit choice for
venture-backed firms”. Review of Financial Studies 24, 3105-3138.
Barber, B., Lyon, J. (1997). “Detecting long-run abnormal stock returns: The empirical power and
specification of test statistics”. Journal of Financial Economics 43, 341-372.
Barry, C., Muscarella, C., Peavy, J., Vetsuypens, M. (1990). “The role of venture capital in the
creation of public companies: evidence from the going public process”. Journal of Financial
Economics 27, 447-71.
Baum, J., Silverman, B. (2004). “Picking winners or building them? Alliance, intellectual, and human
capital as selection criteria in venture financing and performance of biotechnology startups”.
Journal of Business Venturing 19, 411-436.
Ber, H., Yafeh, Y. (2005). “Can venture capital funds pick winners? Evidence from pre-IPO survival
rates and post-IPO performance”. Unpublished working paper.
Bessler, W.,Seim., M. (2011). “European Venture-backed IPOs: An Empirical Analysis”.

Unpublished manuscript. Justus-Liebig-University Giessen.
Bottazzi, L., Da Rin, M. (2002). “Venture capital in Europe and the financing of innovative
companies”. Economic Policy 34, 229-269.
Brau, J., Francis, B., Kohers, N. (2003). “The choice of IPO versus takeover: empirical evidence”.
Journal of Business 76, 583-612.
Brav, A., Geczy, C., Gompers, P. (2000). “Is the abnormal return following equity issuances
anomalous”, Journal of Financial Economics 56, 209-249.
Brav, A., Gompers, P. (1997). “Myth or reality? The long-run underperformance of initial public
offerings: evidence from venture- and non venture-capital-backed companies”. Journal of
Finance 52, 1791-1821.
Brown, M., Forsythe, A. (1974). “Robust Tests for the Equality of Variances”. Journal of the
American Statistical Association- 69, 364-367.
Burkart, M., Gromb, D., Panunzi, F. (1997). “Large Shareholders, Monitoring, and the Value of the
Firm”. The Quarterly Journal of Economics, 693-728
Carhart, M. (1997). “On persistence in mutual fund performance” Journal of Finance 52, 57-82.
Cumming, D., MacIntosh, J. (2003). “A Cross-Country Comparison of Full and Partial Venture
Capital Exits”. Journal of Banking and Finance 27, 511-548.
Da Rin, M., Hellmann, T., Puri, M. (2011). “A survey of venture capital research”. NBER Working
Paper, 17523.
Da Rin, M., Nicodano, G., Sembenelli, A. (2006). “Public policy and the creation of active venture
capital markets”. Journal of Public Economics 90, 1699-1723.
Engel, D. (2002). “The impact of venture capital on firm growth: An empirical investigation”. ZEW
Discussion Paper No. 02-02.
Fama, E. (1998). “Market efficiency, long-term returns, and behavioral finance”. Journal of Financial
Fama, E., French, K. (1993). “Common risk factors in the returns on stocks and bonds”. Journal of
Financial Economics 33, 3-56.
Field, L. (1998). “The IPO as the First Stage in the Sale of the Firm”. Working Paper. Pennsylvania
State University.
Gompers, P., Lerner, J. (1997). “Risk and reward in private equity investments: The challenge of
performance assessment”. Journal of Private Equity 1, 5-12.
Gompers, P., Lerner, J. (2003). “The really long-run performance of initial public offerings: The pre-
Nasdaq evidence”. Journal of Finance 58, 1355-1392.
Hart, O., Moore, J. (1994). “A theory of debt based on the inalienability of human capital”. Quarterly
Journal of Economics 109, 841-879.
Heckman, J. (1979). “Sample selection bias as a specification error”. Econometrica 47, 153-161.
Hege, U., Palomino, F., Schwienbacher, A., (2003). “Determinants of venture capital performance:
Europe and the United States”. Unpublished manuscript. HEC School of Management.
Hsu, D. (2004). “What Do Entrepreneurs Pay for Venture Capital Affiliation?”. The Journal of
Finance 59, 1540-6261.
Jain, B., Kini, O. (1999). “The Life Cycle of Initial Public Offering Firms”. Journal of Business
Finance & Accounting 26, 1281-1307.
Jain, B., Kini, O. (2000). “Does the Presence of Venture Capitalists Improve the Survival Profile of
IPO Firms?”. Journal of Business Finance & Accounting 27, 1139-1183.
Krishnan, C., Masulis, R., Ivanov, V., Singh, A. (2011). “Venture capital reputation, post-IPO
performance and corporate governance”. Journal of Financial and Quantitative Analysis,
forthcoming.
Lerner, J. (1994). “Venture capitalists and the decision to go public”. Journal of Financial Economics
35, 293-316.
Lerner, J., Shane, H., Tsai, A. (2003). “Do equity financing cycles matter? Evidence from
biotechnology alliances”. Journal of Financial Economics 67, 411-446.
Loughran, T., Ritter, J. (1995). “The new issues puzzle”. Journal of Finance 50, 23-51.
Lyon, J., Barber, B., and Tsai, C. (1999). “Improved methods of tests of long-horizon abnormal stock
returns”. Journal of Finance 54, 165-201.
MacIntosh, J. (1997). “Venture capital exits in Canada and the United States”. Financing Growth in
Canada. University of Calgary Press, 279-356.
Megginson, W., Weiss, K. (1991). “Venture capitalist certification in initial public offerings”. Journal
of Finance 46, 879-903.
Nahata, R. (2008). “Venture capital reputation and investment performance”. Journal of Financial
Ritter, J. (1984). “The “hot issue” market of 1980”. Journal of Business 57, 215-241.
Ritter, J. (1991). “The long-run performance of initial public offerings”. Journal of Finance 42, 365-
394.
Ritter, J. (2011). “Initial public offerings: tables updated through 2010”. Unpublished working paper.
Ritter, J. (2012), “Initial Public Offerings: VC-backed IPO Statistics Through 2011”. Unpublished
working paper.
Sahlman, W. (1990). “The structure and governance of venture-capital organizations”. Journal of

Financial Economics 27, 473-521.
Schwienbacher, A., (2005). “An empirical analysis of venture capital exits in Europe and the United
States”. Mimeo., University of Namur.
Tykvova, T., Walz, U. (2005). “Are IPOs of different VCs different?” Unpublished working paper.
Yung, C., Çolak, G., Wang, W. (2008). “Cycles in the IPO market”. Journal of Financial Economics
89, 192-208.

The Long-Term Performance of Venture Capital Backed IPOs: Comparing The United States and Europe

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Long-Term Performance of Venture Capital Backed IPOs: Comparing The United States and Europe

Uploaded by

Copyright:

Available Formats

The Long-Term Performance of Venture Capital Backed IPOs:

Comparing the United States and Europe

Author: Belizar Marinov

Keywords: venture capital, initial public offering, long-term performance, europe

JEL Classification: G24; G32; G14; G15

II. Literature review

Related to the hypothesis for market timing is the well-researched phenomenon of

I perform a manual procedure of matching the IPO companies from VentureXpert

My first set of event time regressions tries to explain cross-sectional differences in

BHAR_3Y_log = b0 + b1*US_dummy + b2*US_VC_ratio + b3*VCs_involved + b4 *book_to_market +

Cumulative abnormal returns (CAR) is a method alternative to buy-and-hold abnormal

For completeness I include CAR in my cross-sectional analysis. I calculate CAR by

calendar_return-rf_3Y = b0 + b1*mkt-rf + b2*smb + b3*hml + b4*US_dummy_vw +

It should be noted that as it is established practice in previous studies, the benchmark

Unlike in Table I, now I calculate buy-and-hold abnormal returns by splicing in the

In Panel B I show the results of an application of the Kruskal-Wallis equality-of-

Next I run a cross-sectional regression on buy-and-hold abnormal returns and include

Results do not show company origin or VC origin to have an influence on long-term

VI. Conclusion and further research

This paper compares the long-term performance of US and European venture-backed

These results could be of interest to institutional investors that allocate funds to

Descriptive Statistics of Variables for the US and European Subsamples

Tests for Difference in Means Between the US and European Subsamples

(table on the next page)

Long-Run Performance of VC-Backed IPOs: US & Europe

Long-Run Performance of VC-Backed IPOs: US & Europe

(Table on the next page)

Long-Run Performance of VC-Backed IPOs: US & Europe

Long-Run Performance of VC-Backed IPOs: US & Europe

(table on the next page)

Table VII (Continued)

(table on the next page)

Table VIII (Continued)

Bessler, W.,Seim., M. (2011). “European Venture-backed IPOs: An Empirical Analysis”.

Sahlman, W. (1990). “The structure and governance of venture-capital organizations”. Journal of

You might also like

BHAR_3Y_log = b0 + b1US_dummy + b2US_VC_ratio + b3VCs_involved + b4 book_to_market +

calendar_return-rf_3Y = b0 + b1mkt-rf + b2smb + b3hml + b4US_dummy_vw +