The relationship between venture capital backing and the top management team quality of firms going public and implications for initial public offerings

We make use of hand-collected data on a large sample of entrepreneurial firms going public to analyze the association between venture capital (VC) backing and the top management team (TMT) quality of firms at the time of their initial public offerings (IPOs), and the effect of both VC-backing and TMT quality on the growth in their post-IPO operating performance and IPO firm valuations. We first show that VC-backing is associated with higher TMT quality. We then show that both higher TMT quality and VC-backing lead to higher growth in post-IPO operating performance and higher IPO valuations. We find that the above two variables affect the growth in post-IPO operating performance through an “ability channel,” whereby the TMTs of such firms choose projects with higher equilibrium scale and implement them more ably. Further, TMT quality and VC-backing affect IPO firm valuations not only through the above ability channel, but also through a “certification channel,” whereby higher TMT quality and VC-backing credibly certify intrinsic firm value to the IPO market, thus reducing the extent of asymmetric information facing such firms in the IPO market and yielding these firms higher IPO valuations. Finally, we show that TMT quality and VC-backing act as complements in their effect on IPO firms' growth in post-IPO operating performance.     

Alliance portfolios and shareholder value in post-IPO firms: The moderating roles of portfolio structure and firm-level uncertainty

Using longitudinal data for initial public offering (IPO) firms, we examine the role played by structural differences between different types of alliance portfolios in the relationship between IPO firm alliance portfolios and shareholder returns. We show that because of the different signals they send to the capital market, different types of alliance portfolios affect IPO firm performance differently. Namely, financial markets seem to reward firms whose alliance portfolio is diversified across different types of alliances (a portfolio high in functional diversity), but not those who align their alliance partners into multiple functional points in the value chain (a portfolio high in vertical scope). We also examine the signaling role of alliance portfolios under different IPO firm uncertainty conditions. We note that uncertainty about the IPO firm is not limited to pre-IPO quality uncertainty. Investors also face transition uncertainty, post-IPO uncertainty about the ability of the firm to adapt to the new managerial challenges it faces and succeed post-IPO. We find that these two types of uncertainties moderate alliance portfolio effects in different ways. The beneficial effects of alliance portfolios in mitigating liabilities of newness is of greater importance for firms associated with higher quality uncertainty and for those associated with lower transition uncertainty.     

Founder management and the market for corporate control for IPO firms: The moderating effect of the power structure of the firm

This study draws on agency and stewardship theory to evaluate the relationship between alternative governance regimes (founder versus non-founder CEO) adopted at the time of going public on post-IPO economic outcomes in the market for corporate control. We find that the presence of founder CEOs reduces the likelihood of post-IPO change of control but enhances target IPO firm wealth by increasing acquisition premiums. Additionally, we examine whether measures of CEO power over the board moderate the relationship between founder management and target IPO firm wealth. Our results suggest that CEO duality is the most effective instrument of CEO power available to founder CEOs to positively influence target firm wealth. Further, we find that while founder CEOs utilize power derived from CEO duality to increase acquisition premiums, non-founder CEOs use board leadership power to expropriate shareholder wealth.     

Multinational Corporate Power,Influence and Responsibility in Global Supply Chains

This study examines the influence of underwriter–auditor relationship (UAR) on pre-initial public offering (IPO) earnings management. Using a sample of Chinese to-be-listed firms, we find that a close UAR, as reflected in repeated collaborations between an underwriter and an audit firm in IPOs, is positively associated with pre-IPO earnings management. This association is more pronounced for firms with politically connected auditors/underwriters, firms with less reputable auditors/underwriters, firms located in provinces with weak legal environment, firms to-be-listed on boards with lax listing requirements, and firms whose auditors are with low industry specialization, and legal liability exposures. We provide further evidence that UAR is associated with greater likelihood of irregular activities in post-IPO period and poorer post-IPO financial performance. To the extent that we control for alternative explanations and potential endogeneity, our results suggest that the collusion incentive is likely to drive repeated collaborations between underwriters and auditors in the Chinese IPO market. Our findings provide interesting implications for auditors, investors, and regulators seeking to understand the Chinese IPO market.     

Factors influencing the choice between founder versus non-founder CEOs for IPO firms

Despite the innate advantage founder CEOs have by virtue of their founding vision, organizational influence, positive image, and ownership stakes to lead their firms at their initial public offering (IPO), extant empirical evidence indicates that between a third to half of IPO firms go public with non-founder CEOs at the helm. Relatively little however, is known regarding factors that influence the choice of founder versus non-founder CEO for firms issuing IPOs. This study examines the impact of factors such as founder characteristics, size of founding team, governance structure, ownership structure, top management team independence, venture capitalist influence, and the demand for equity financing on the probability of founder CEO at IPO.     

The role of internationalization on the IPO performance of service firms: Examination of initial returns,long-run returns,and survivability

This study examines the effect of internationalization on the initial and long-run IPO performance of service firms. The study discusses that pre-IPO internationalization of service firms contributes to the explanation of long-discussed IPO underpricing phenomenon, and underperformance of IPOs in the long-run. Sample of the study includes 1822 IPO issues conducted by US service firms between 1980 and 2009. Findings of the study suggest that international service firms leave less money on table in their IPOs compared to domestic service firms by providing significantly lower first day returns to their investors on their first day of public trading. Moreover, our findings provide evidence that 3-year cumulative abnormal returns and 3-year buy-and-hold returns of international service firms are significantly higher than domestic service firms, and international service firms outperform domestic service firms in both operating return on assets and operating cash flows in the post-IPO period. Lastly, the study documents that survival rate of service firms subsequent to an IPO issue increases with pre-IPO internationalization.     

The effect of trademark breadth on IPO valuation and post-IPO performance: an empirical investigation of 1510 European IPOs

Trademarks differ in breadth and can cover a wide range of categories of goods and services. We draw on real options theory and argue that greater trademark breadth constitutes a valuable real option that is associated with higher firm valuation and performance. We analyze a sample of 1510 firms that went public in Europe between 2002 and 2015 and find a positive effect of trademark breadth on initial public offering (IPO) valuation and post-IPO performance. We implement a contingency analysis to contrast real options and signaling theory and find stronger support for the real options perspective.     

Going Public to Grow? Evidence from a Panel of Italian Firms

This paper investigates the consequences of the decision to go public for the growth of Italian firms using US firms as a benchmark for comparison. We find Italian firms conducting IPOs are larger than US firms, but raise fewer funds from the IPO and grow more slowly afterwards. We also compare Italian IPOs across time. Firms going public in the 1990s display features that are more similar to US IPOs. We describe changes to the Italian economy and financial markets that are potentially responsible for the change. We compare firms of different size and with different governance structures, and we find that they behave differently after going public. Our results suggest that going public does not guarantee faster growth or more jobs. As such, public policies that simply increase access to equity markets may not be effective unless they provide incentives for the firms’ decision-makers to use the new capital to grow.      

Does acquiring venture capital pay off for the funded firms? A meta-analysis on the relationship between venture capital investment and funded firm financial performance

Researchers and practitioners frequently propose that venture capital (VC) is an important resource to increase the performance of funded firms, especially in environments of uncertainty. In this paper we scrutinize these theoretical propositions, following an evidence-based research approach. We synthesize 76 empirical samples on 36,567 firms. We find a small positive performance effect of VC investment on funded firm performance; however, the effect vanishes if researchers control for industry selection effects. Furthermore, we find that the performance effect mainly relates to firm growth while profitability is unaffected. We also uncover that performance effects are reduced when the funded firms are very young or very mature. In addition, studies focusing on IPO events, which constitute the majority of studies, determine a substantially smaller performance effect. We discuss theoretical implications and offer suggestions for future research on VC.     

Board member age,stock seasoning and the evolution of capital structure in Chinese firms

This study examines the evolution of capital structure for Chinese stock issuers over an eleven-year period, stretching three years pre- to eight years post-listing. The paper scrutinizes the role of a key demographic in this seasoning process: The age of board officers. The present study’s key postulate is that board age proxies for a firm’s growth options. While issuer indebtedness exhibits little to no connection with other board properties, a strong inverse association exists with officer age. Moreover, entities with older boards experience notably smaller contractions in leverage on listing, as well as more subdued upswings post-IPO. Results are congruent with older board firms possessing fewer growth options and raising less capital at IPO. Additionally, study findings suggest that the Global Financial Crisis delayed Chinese firms’ re-leveraging adjustments post-IPO. Finally, changes to leverage at IPO, and in the years thereafter, appear similar for both hot- and cold-market issuers.     

Initial Public Offering Investor Valuations: An Examination of Top Management Team Prestige and Environmental Uncertainty

Relying on one of the more notable entrepreneurial settings, an initial public offering (IPO), this article extends prior work on top management team (TMT) characteristics. We examine whether or not prestigious TMTs at the time of an IPO enhance organizational legitimacy and thereby provide a signal to potential investors. Because an IPO represents an entrepreneurial context characterized by high levels of uncertainty, we also consider the impact of environmental uncertainty on the TMT prestige/investor valuation relationship. We find that both an element of TMT prestige and environmental uncertainty influence investor valuations. However, we also find that the influence of prestige does not assuage investors when analyzing IPOs in different environmental conditions.     

The Effects of Industrial Policy Support on IPO Performance: Evidence from Listed Enterprises of the Chinese SMEs Board

This study examines the effects of industrial policy support on the initial public offering performance of listed enterprises on the Chinese small and medium‐sized enterprises board. We observe that industrial policy support has a positive effect on IPO performance. In addition, we provide evidence that after the financial crisis, the decrease of IPO underpricing resulting from policy support implemented three months before firms going public is less than that deriving from the policy support issued six months prior to listing, whereas the effect of industrial policy support on post‐IPO operating performance has increased after the financial crisis.     

Structuring deals and governance after the IPO: Entrepreneurs and venture capitalists in high tech start-ups

In an effort to better understand the effects of venture capital investment on selected firm governance and financing structures, we examined the post-IPO experiences of 190 biotechnology and healthcare firms (see appendix). Our study revealed that in virtually all cases, the involvement of venture capitalists reduced the role of the founder-entrepreneur in strategic decision making. This was illustrated by the larger proportion of outside directors when venture capitalists invested and the smaller proportion of entrepreneurs who remained officers or in board positions after the IPO. We also found that venture capitalists rarely invested alone, and preferred to structure deals in which venture capital partners share both risks and rewards.     

Do Venture Capitalists Add Value to Small Manufacturing Firms? An Empirical Analysis of Venture and Nonventure Capital‐Backed Initial Public Offerings

We examine a set of small, venture capital (VC)-backed manufacturing firms and compare it to a control sample of nonVC-backed manufacturing firms going public between 1990 and 1996. We use the degree of underpricing, three-year sales growth, three-year cumulative stock return, and three-year survivability as measures of success. First, we test if the presence of VC backing results in significant differences in success between the two samples. Next, we test if certain VC and deal characteristics are discriminators within the VC-backed sample of firms. Despite previous literature, which argues for either inferior or superior VC post-initial public offering (IPO) performance, these tests indicate no significant differences between VC- and nonVC-backed firms. Additionally, it is found that VC and deal characteristics are not discriminating factors within the VC sample.     

Testing a model of signals in the IPO offer process

This study examines agency and market signals related to a sample of high-technology firms seeking an initial public offering (IPO). We test a model of the IPO offer process in high-technology firms. Results indicate that certain pre-market and primary market factors affect the offer price received by entrepreneurs and investors, while the secondary market factor did not. Our model may help entrepreneurs position their organization prior to and during the IPO process.     

A comparison of Japanese and U.S. firms completing initial public offerings

We set out to examine firms breaking into the top tier of for-profit companies in the U.S. and Japan to find differences across the two groups. To accomplish this, we conducted a questionnaire survey of companies that had recently undergone an initial public offering (IPO) in each country and compared them on characteristics frequently associated with new firms.As we expected, even when the different sizes of the two economies were taken into account, there were considerably fewer listings in Japan than in the U.S. One reason for this is that the listing requirements for young Japanese firms, although not stricter, are much more strictly enforced. Hence, fewer Japanese firms are able to list.Our results show that the Japanese firms were markedly different from their U.S. counterparts on several characteristics. They tended to be older and larger, which is consistent with more stringent listing requirements in Japan. They were also much more often led by their original founders. This is a surprising result given that the Japanese firms, being older, had longer to lose their founders. When a successor to the founder was president, it was much more often a relative of the founder than in the U.S. The Japanese founders rated themselves higher on relatively emotional characteristics, such as aggressiveness, paternalism, and charisma than did either the U.S. presidents or the Japanese nonfounder presidents.The Japanese firms relied solely on the president for decision-making prior to the IPO more often than the U.S. firms did. However, the Japanese firms also moved in greater numbers to group decision-making around the time of the IPO.The post-IPO investment strategies of the Japanese firms were characterized by a focus on new product development, an increase in R&D spending, and investment in the company's capital plant. In contrast, the U.S. firms reported more interest in exploiting their existing market and buying other companies, usually leaving R&D spending at its pre-IPO level.Overall, it is surprising that on many characteristics, the Japanese IPOs tended to fall more to the extreme associated with new companies than did the U.S. firms. They were dominated by founder influence, the founders were apparently highly emotional, their management style was initially autocratic, and their strategies targeted innovation and internal development as avenues to growth. This pattern is consistent with a prior hypothesis that the lack of structural support for new firms in Japan results in only the most extreme personalities pursuing and succeeding in company formation.For researchers, a significant implication of this research is that Japanese ventures may not behave according to the same rules as U.S. ventures. Research samples that fail to distinguish nationality may obscure cross-regional variations.For practitioners, the major lesson is that a Japanese venture is likely to be much different from one in the U.S. Dealing with one is probably even more unlike dealing with an established company than working with a U.S. start-up might be.     

Effects of differential information on the after-market valuation of initial public offerings

This paper examines the after-market for initial public offerings (IPOs), particularly the security valuation effects of structural differences in available information. There is a diversity of information among issuing firms at the time of their offering and particularly under certain market conditions. Because this diversity decreases with time and after-market trading, the IPO market provides an ideal setting for testing errors due to differential information levels in early after-market valuation of IPO firms. We find evidence that during “hot” market conditions and for firms characterized by low levels of available information, the market values of issuing firms are more likely to be overestimated in the immediate after-market. We also find positive overestimation of market values to be more likely for larger IPOs and for those marketed by the less prestigious underwriters.     

An Empirical Study of the Impact of CEO Characteristics on New Firms' Time to IPO*

An initial public offering (IPO) is one of the most critical events in the life of a firm. As the IPO market continues to attract attention from both entrepreneurs and investors, research examining the relationship between the firm's characteristics and its IPO performance is growing. In this paper, we use the upper echelon perspective to empirically examine the relationship between the firm's chief executive officer (CEO) and the firm's time to IPO, a relationship that has so far received little attention. Using data obtained from 237 IPOs in the U.S. software industry, we found that the CEO's prior executive experience, network, and age are significantly related to the new firm's time to IPO. This study extends the understanding of the important role of the CEO in the IPO and provides investors greater insight into those variables that influence the speed with which firms go public.     

Quality signaling through ex-ante voluntary information disclosure in entrepreneurial networks: evidence from franchising

This paper examines antecedents of ex-ante voluntary information disclosures for standardized contracts in entrepreneurial networks. Entrepreneurs (e.g., franchisors) may make such disclosures to prospective business partners in order to signal profitability of partnering, attract financial and managerial resources, and develop their entrepreneurial networks. In practice, only a fraction of franchisors make financial performance representations (FPRs), an ex-ante voluntary information disclosure to prospective franchisees. We address gaps in the signaling, voluntary information disclosure, franchising, entrepreneurship, and small- and medium-enterprise (SME) literatures. We draw on signaling theory to develop a theoretical framework and investigate factors that influence a franchisor’s disclosure decision. We evaluate hypotheses from our theoretical framework through econometric analyses of multi-sector panel data for the US franchising industry. We estimate a logit model and use lagged independent variables to address our dichotomous independent variable and potential endogeneity, respectively. Our results support the view that firms signal their quality through FPRs to attract potential business partners and expand their entrepreneurial networks. Beyond the extant literature, we find that rigorous partner qualification is another driver of voluntary information disclosure in franchising. Our findings also provide empirical support for the complementary role played by multiple quality signaling mechanisms used by franchisors and yield public policy implications for franchising.     

Firm value and its relation to equity retention levels, forecast earnings disclosures and underpricing in initial public offerings in Hong Kong

This study helps extend our understanding of the factors underlying the valuation of initial public offering (IPO) firms within the Hong Kong market context. The issues investigated are all the more important given Hong Kong's unique position in China, where free and unfettered capital markets entice global institutions wishing to partake in the ‘China investment story’. We find support for three signals of initial firm value: the fraction of equity retained by pre-listing stakeholders [Leland, H., & Pyle, D. (1977). Information asymmetries, financial structure and financial intermediation. Journal of Finance, 32, 371–387], the voluntary disclosure of a prospectus earnings forecast [Trueman, B. (1986). Why do managers voluntarily release earnings forecasts. Journal of Accounting and Economics, 53–71] and the amount of funds ‘given-up’ through IPO underpricing [see Allen, F., & Faulhaber, G. R. (1989). Signalling by underpricing in the IPO market. Journal of Financial Economics, 23, 303–323; Grinblatt, M., & Hwang, C. Y. (1989). Signalling and the pricing of new issues. Journal of Finance, 44, 393–420; Welch, I. (1989). Seasoned offerings, imitation costs, and the underpricing of initial public offerings. Journal of Finance, 44, 421–449]. Moreover, the signals appear robust to different firm valuation measures (i.e., market-to-book and Tobin's Q) and to the inclusion/exclusion of PRC state-owned H-share issuers.A number of other important contributions also emerge. First, we develop a new measurement form for the pre-listing shareholders’ equity retention level (α) by decomposing it to reflect differential effects from primary and (‘voluntary’ and ‘involuntary’) secondary offers. We further show that after accounting for listing rule effects—which partially drive the choice of the retained equity level in the Hong Kong setting—the equity retention-firm value relation is seen with much greater clarity.In a later stage of analysis we deepen the signal-firm value findings by relating the three signals to post-IPO earnings. We note a positive association between the fraction of equity retained by pre-listing owners and earnings growth. However, this association weakens somewhat beyond the first two accounting year-ends post-listing. Significantly, earnings appreciation appears markedly weaker for issuers going to market with a secondary offer component within their overall IPO. Finally, consistent with Jain and Kini's [1994. The post-operating performance of IPO firms. Journal of Finance, 49(5), 1699–1726] US evidence, IPO underpricing appears to have little or no association with post-listing earnings.