Series Vol. 8 , 13 September 2023
* Author to whom correspondence should be addressed.
Venture capital investors focus on early-stage enterprises, the market participants have limited information about their prospects. Their investment decisions involve complicated factors and potentially the failures in the past can affect their future investment decisions. In this paper, within the context of venture capital investment, I examined the impact of the rate of IPO failures in one sector on future investment in the same sector. However, the direction of effect is ambiguous. The learning effect from past failure can be positive if the VC investors gain valuable experience from it. Alternatively, the learning effect can be negative as it reveals the VCs’ incapability to invest in that given sector. I exploit a data set from Preqin and a fixed-effect model to help me identify results that are consistent with a positive learning story. This finding contributes to our understanding of how VC investors make investment decisions and how financial market participants react to failures more broadly.
IPO, venture capital, fixed-effect model
1. Gornall W, Strebulaev I A. The economic impact of venture capital: Evidence from public companies[J]. Available at SSRN 2681841, 2021.
2. Gompers P, Kaplan S N, Mukharlyamov V. What do private equity firms say they do?[J]. Journal of Financial Economics, 2016, 121(3): 449-476.
3. Harris R S, Jenkinson T, Kaplan S N. How do private equity investments perform compared to public equity?[J]. 2015.
4. Gompers P A. Optimal investment, monitoring, and the staging of venture capital[J]. The journal of finance, 1995, 50(5): 1461-1489.
5. Agarwal R. Technological activity and survival of firms[J]. Economics Letters, 1996, 52(1): 101-108.
6. Shapiro C. Premiums for high-quality products as returns to reputations[J]. The quarterly journal of economics, 1983, 98(4): 659-679.
7. Sørensen M. How smart is smart money? A two‐sided matching model of venture capital[J]. The Journal of Finance, 2007, 62(6): 2725-2762.
8. [8Harris R S, Jenkinson T, Kaplan S N. Private equity performance: What do we know?[J]. The Journal of Finance, 2014, 69(5): 1851-1882.
9. Huang J, Jain B A, Shao Y. CEO power, product market competition and the acquisition motive for going public[J]. Accounting & Finance, 2019, 59(4): 2479-2507.
10. Hermansson C, Song H S. Financial advisory services meetings and their impact on saving behavior–A difference-in-difference analysis[J]. Journal of Retailing and Consumer Services, 2016, 30: 131-139.
The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.