Presenter: Benedetta Montanaro, Politecnico di Milano

Discussant: Tom Vanacker, Ghent University

Abstract

The paper studies how a sequence composed of multiple signals influences the valuation that entrepreneurial ventures receive at acquisition. Along the venture life-cycle, startups generally first obtain capital from VCs and then go through an IPO. In particular, the strength of the former signal influences the way receiver perceive the latter signal and may become a double edged sword. We argue that, after receiving a strong signal relating to the type of VCs that are backing a focal startup, investors set a high aspiration level about the quality of the startup. Consequently, a subsequent weak signal relating to the type of stock market in which the startup is listed may have a detrimental effect on firm’s valuation. We test our hypotheses performing a difference-in-difference model on a sample of 1935 European entrepreneurial ventures. Results show that a strong signal related to being VC-backed will make market observers set their expectations on the firm’s quality at a higher level, so that becoming public on a less reputable market will decrease its valuation.

AUTHORS: Massimo G. Colombo, Montanaro Benedetta, Politecnico di Milano.