Essays in Valuation

Abstract

This Ph.D. dissertation studies corporate finance, with a focus on valuations in corporate transactions. The first chapter investigates whether venture capitalists strategically price financing rounds so as to improve interim returns ahead of fundraising events. We find that when a venture capitalist is investing within a firm already within their portfolio immediately prior to a fundraising event, the financing rounds have abnormally high step ups in valuation and that the returns from such rounds are predictably lower. This pattern is not explained by deal or investor characteristics, and is stronger when multiple VCs within the syndicate have aligned incentives or are tightly networked. Our results bring into question the veracity of portfolio valuations based upon investing round pricing, as fundraising pressure may lead venture capitalists to strategically price deals. Within the second chapter, we investigate the paradoxical nature of venture capital as an asset class characterised by significant volatility and the modal price change from one round to the next being 0% (a “flat round”). Further, the proportion of financing rounds with a return of 0% is discontinuous relative to those receiving marginal increases or decreases in price, suggesting such financing rounds have significantly different characteristics relative to other rounds. We find evidence that when compared to a matched sample of financing rounds, rounds with 0% returns have lower future returns, are smaller in size, and are smaller than previous rounds of the same firm. We find evidence that rounds with 0% returns are more likely when previous rounds contain anti-dilution provisions. Such results are consistent with strategic mispricing to avoid the costs incurred by a decrease in firm valuation. The third chapter examines the role of valuation information in Australian public merger and acquisition deals utilising the release of Independent Expert Reports. The information within this report has significant consequences for deal outcomes, with the lower end of the valuation range appearing to function as a reserve price from the perspective of the target firm. I find the responses of both target firms and acquiring firms are consistent with this interpretation. Such effects appear to be independent of the information environment of the target firm, and are consistent regardless of whether the report was voluntary or required. The ability to engage independent third parties to accurately assess valuations may be a potential policy change to mitigate the valuation issues that arise in Chapter 1 and Chapter 2