Abstract

We investigate the relation between IPO underpricing and the number of private capital rounds secured by unicorn firms related to other firms. We introduce a Bayesian arbitrage model, where the decision of going public is made by both the founder of the startup and the incumbent venture capitalists (VCs). Using a threshold regression model, we empirically analyse the association between underpricing and the number of financing rounds. Our findings highlight a positive relationship up to the fourth round for unicorns, whereas the relationship is negative for non-unicorn firms. Beyond this juncture, the relationship weakens for both types of firms, supporting the informative role of financing rounds in the IPO market. Consequently, our research indicates that the connection between IPO underpricing and the number of private financing rounds is non-monotonic and that being unicorn is not innocuous for underpricing.