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Venture Capital Conflicts of Interest: Evidence from Acquisitions of Venture-Backed Firms

Published online by Cambridge University Press:  22 December 2010

Ronald W. Masulis  and
Rajarishi Nahata
Ronald W. Masulis
Affiliation:
Australian School of Business, University of New South Wales, Sydney, NSW 2052 Australia and on leave from Vanderbilt University. [email protected]
Rajarishi Nahata
Affiliation:
Zicklin School of Business, Baruch College–City University of New York, 1 Bernard Baruch Way, New York, NY 10010. [email protected]
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Abstract

We analyze the effects of venture capital (VC) backing on profitability of private firm acquisitions. We find that VC backing leads to significantly higher acquirer announcement returns, averaging 3%, even after controlling for deal characteristics and endogeneity of venture funding. This leads us to investigate whether some VCs have interests that conflict with those of other investors. We show that such conflicts arise from VCs having financial relationships with both acquirers and targets, corporate VCs having a dominant strategic focus, and VC funds nearing maturity experiencing pressure to liquidate. Our conclusions follow from examinations of target takeover premia and acquirer announcement returns.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 395 - 430
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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