Are venture capitalists able to certify initial public offerings? Testing using intraday price behavior

This study investigates the trading characteristics of the market microstructure of venturebacked initial public offerings using intraday data from the Taiwan's stock market. Previous studies have demonstrated that venture capitalists may fulfill a certification role and can reduce information uncertainty associated with initial public offerings. These studies also identified an adverse selection problem in which IPO firms with poor operating performances tend to seek venture capital support. The empirical results demonstrate no significant differences in relative effective spreads between venture-backed and non-venture-backed IPOs. The information asymmetry cost and the price volatility of venture-backed IPOs exceed those for non-venture-backed IPOs. Additionally, the degree of underpricing is found to be the main influence on the information asymmetry cost. Contrary to traditional venture capital studies, the results of this study indicate that the certification effect and monitoring services of venture capitalists do not prevail in the perception of market place in the new issue market in Taiwan.