Cost of Capital v.
These sales, which occur after substantial run-ups in share value, generate a sub- stantial price reaction immediately around the event. In the months after distri- bution, returns apparently continue to be negative. When the short- and long-run reactions are decomposed, they are consistent with the view that venture capital- ists use inside information to time stock distributions: Distributions of firms brought public by lower quality underwriters and of less seasoned firms have more nega- tive price reactions.
Two cases initiated by the U. Securities and Exchange Commission SEC in the early s1 stim- ulated an interest in this relationship and its implications for social welfare e.
An extensive body of research has examined the trading by corporate insiders. Most notably, Xeyhun e. But as Meulbroek notes: We thank Tim Bliamptis, T.
Bondurant French, Robert Moreland, Tom Philips, and several organizations-Brinson Partners and its various affiliate limited partnerships, Kemper Securities, RogersCasey Alternative Investments, the US West Investment Trust, and a major corporate pension fund-for providing us with distribution data and limited partnership agreements.
All errors are our own. In the Matter of Cady, Roberts and Co. Texas Gulf Sulphur Co. Self-reported corporate transactions data [are] less appropriate for ad- dressing [the impact of informed traders on stock prices]. The corporate transactions are by definition not based on material, non-public infor- mation.
Because corporate insiders cannot legally trade on such infor- mation, they would most likely refrain from reporting their violative transactions to the SEC. But rather than focusing on illegal trades, as Meulbroek does, we examine a class of legal transactions that are largely exempt from SEC oversight-the distribution of shares in public companies by venture capital funds to their limited partners.
Venture capitalists raise money from investors and make equity investments in young, high-risk, high- growth companies.
Most successful venture-capital-backed companies even- tually go public in an underwritten initial public offering IPQ. Venture capitalists can liquidate their position in the company by selling shares on the open market and then paying those proceeds to investors in cash.
More frequently, however, venture capitalists make distributions of shares to in- vestors in the venture capital fund.
These distributions have several features that make them an interesting testing ground for an examination of the impact of transactions by informed insiders on securities prices.
Because they are not considered to be "Sales," the distributions are exempt from the antifraud and antimanipulation pro- visions of the securities laws.
The legality of distributions provides an im- portant advantage. Comprehensive records of these transactions are compiled by the institutional investors and intermediaries who invest in venture funds, addressing concerns about sample selection bias.
Like trades by corporate insiders, transactions are not revealed at the time of the transaction. Ven- ture capitalists can immediately declare a distribution, send investors their shares, and need not register with the SEC or file a report under Rule 16 a.
The occurrence of such distributions can only be discovered from corporate filings with a lag, and even then the distribution date cannot be precisely identified.
To identify the time of these transactions, one needs to rely as we do on the records of the partners in the fund. We can also characterize in detail the features of the venture funds making the distributions, the firms whose shares are being distributed, and the changes associated with the transactions in a way that can discriminate between the various alternative explanations for these patterns.
From the records of four institutions, we construct a representative set of more than transactions by funds over a decade-long period. The results are consistent with venture capitalists possessing inside information and with the partial adjustment of the market to that information.
After significant increases in stock prices prior to distribution, abnormal returns around the distribution are a negative and significant The sign and significance of the cumulative excess returns for the twelve months following the distribution are sensitive to the benchmark used.
The market's ability to discern and react to the information content of distribu- tions is consistent with Seyhun and Meulbroek Significant differences appear in the returns for some subsamples. Distri- butions that occur in settings where information asymmetries may be greatest-especially where the firm has been taken public by a lower-tier underwriter and the distribution is soon after the IPO-have larger imme- diate price declines.
Postdistribution price performance is related to factors that predict event window returns. Many of the recipients of these distributions e. Because distributions are not illegal, the limited partners have no reason to disguise their sales aside from reasons of strategic trading.Research Associate Andrew S.
Janower developed this software under the supervision of Professor William A. Venture capitalists (VCs) are regularly presented with valuation challenges. Developed for use with "The Venture Capital Method - Valuation Problem Set" (HBS Case ).
Shares Outstanding Before Investment Sahlman as the basis.
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