Over the past two decades, finance, strategy, and entrepreneurship research has emphasized the critical role of market intermediaries – venture capitalist firms (VCFs) and underwriters within the initial public offering (IPO) process. Both actors occupy a critical role in financial intermediation by reducing the information asymmetries inherent in the IPO process, where, more typically, venture owners establish ties to VCFs prior to engaging with underwriters. In doing so venture owners are faced with decisions related to ownership retention and the strategic control of the firm. Focusing on the IPO underpricing outcome, we propose that the ex-ante decision to retain greater venture ownership is endogenous to the relationship of VCF and underwriter quality in certifying the IPO firm.

Our study intends to contribute to the literature in three ways. First we re-investigate the certification role played by underwriters in the Japanese IPO market. Second, we extend the framework developed by Habib and Ljungqvist (2001) by assuming that the choice of VCF is endogenously determined. In this context, we examine the effect of VCF reputation on underpricing. Third, we re-explore the conflict of interest hypotheses in Japan. Changes in Japanese venture capital market landscape since Hamao, Packer and Ritter (2000) provide us with a sample of IPOs that is substantially different in structure from the sample used in their study. We believe that the Japanese market is appropriate to test our hypotheses because our sample includes a sufficiently large percentage of IPOs that are backed by independent VCFs and securities-affiliated VCFs.