The Rise of Venture Capital and IPO Quality

Article abstract: We show that an increase in the supply of venture capital (VC) leads to a decline in the quality of firms going public. We argue that due to VC selectivity, private capital flows disproportionately to the most promising firms causing them to hold back from public issuance. Post-IPO abnormal returns indicate that the stock market does not fully incorporate this decline in quality at the time of the IPO. Our research adds to recent evidence on the negative impact of fast-growing private markets on Main Street investors.