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.     

Early teams: The impact of team demography on VC financing and going public

This study investigates how top management team (TMT) demographic characteristics affect firm outcomes for young high technology firms in Silicon Valley. We study how team composition and turnover shape an entrepreneurial firm's ability to attract venture capital and its ability to successfully complete an initial public offering. We find that broad access to information by virtue of having top management team members that have worked for many different employers (diverse prior company affiliations) and have diverse prior experiences (functional diversity) tend to be associated with positive outcomes. In addition, entrants to and founder exits from the TMT increase the likelihood that a firm achieves an IPO. TMT exits, in turn, reduce the likelihood of achieving an IPO. Results also suggest that prior human capital experience is consistently associated with positive firm outcomes. These findings suggest that team experiences, composition and turnover are all important for bringing new insights to the firm and are associated with the likelihood that an entrepreneurial firm will succeed.     

The Impact of Environment Uncertainty and Effectual Flexibility on Entrepreneurial Resource Combination: The Moderating Effect of Entrepreneurial Self-efficacy

Entrepreneurial resource combination is widely recognized as a key enabling factor to a new venture’s survival and growth, but how and why resources are integrated remain elusive. Borrowing from the theory of resource combination proposed by Sirmon, Hitt and Ireland (2007), this study empirically examines how environmental uncertainty impacts entrepreneurial resource combination. We also examine the mediating effect of effectual flexibility on the relationship between environmental uncertainty and entrepreneurial resource combination to see how new ventures utilize flexibility to neutralize the threat of environmental uncertainty. The moderating effect of entrepreneurial self-efficacy is also examined to see how entrepreneurs’ self-cognition affects these relationships. Examining data from 287 new ventures, we find that both environmental dynamism and environmental hostility have significantly positive influence on entrepreneurial resource combination (including entrepreneurial resource cohesion and entrepreneurial resource coupling). We also find that flexibility mediates the relationship between environmental uncertainty (including environmental dynamism and environmental hostility) and entrepreneurial resource combination. Empirical studies also show that entrepreneurial self-efficacy positively moderates the relationship between environmental dynamism and flexibility but negatively moderates the relationship between environmental hostility and flexibility. Theoretical and practical implications are discussed.     

Alternative Investment Market: A Way to Promote Entrepreneurship

The aim of this paper is to investigate the relationship between firm performance after the IPO and its entrepreneurial orientation (EO). In our work we want to test if entrepreneurial oriented firms show a better market performance signalling that investors valuate it positively. To this purpose, we focus on a particular sample of entrepreneurial firms, i.e. companies that went public on the Alternative Investment Market (AIM) through IPO during the period from 1995 to 2006. Along the lines of Miller (Manage Sci 29:770–791, 1983), Covin and Slevin (Entrep Theory Pract 16:7–25, 1991) and Lumpkin and Dess (Acad Manage Rev 21:135–172, 1996), firms’ entrepreneurial orientation is measured in terms of risk taking, innovation and proactivity. Following the literature in management on investor valuation we use the percent price premium as dependent variable of our model. Our findings confirm a positive impact of entrepreneurial orientation on investors’ valuation. The results of this work underline the relevance of secondary markets, such as the AIM, as a valuable alternative to traditional financial institutions in providing capital to small and entrepreneurial companies.     

TMT Departures and Post‐IPO Outside Director Additions: Implications for Young IPO Firms’ Survival and Performance

We draw on resource‐based logic to argue that relatively stable TMTs and boards are beneficial for young IPO firms because of the need to maintain and develop valuable firm‐specific capabilities and psychological attachment of pre‐IPO TMTs. Using panel data from 272 young IPO firms, we find that pre‐IPO TMT member exits negatively affect young IPO firms’ survival and performance. This negative effect is greater when more post‐IPO outside directors are added. We also find that the above interaction is positively and negatively associated with survival and performance when TMT ownership declines substantially and when firms have a founder CEO, respectively.     

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.     

Passion for entrepreneurship or passion for the product? A conjoint analysis of angel and VC decision-making

Passion is important to venture investors, but what specifically do they want entrepreneurs to be passionate about? This study theorizes that angel investors and venture capitalists consider both entrepreneurs' passion for activities related to the product or service the venture provides (i.e., product passion) and passion for founding and developing new ventures (i.e., entrepreneurial passion). We demonstrate that both types of passion become more appealing when the investor perceives that the entrepreneur is highly open and receptive to feedback, suggesting that openness to feedback mitigates potential concerns associated with passion in its extremes. We further find that venture investors differ in their consideration of passion; angel investors and venture capitalists with more investing experience place greater emphasis on the combination of product passion and openness to feedback, whereas those with more entrepreneurial experience emphasize the combination of entrepreneurial passion and openness to feedback.     

The path-to-profitability of Internet IPO firms

Extant empirical evidence indicates that the proportion of firms going public prior to achieving profitability has been increasing over time. This phenomenon is largely driven by an increase in the proportion of technology firms going public. Since there is considerable uncertainty regarding the long-term economic viability of these firms at the time of going public, identifying factors that influence their ability to attain key post-IPO milestones such as achieving profitability represents an important area of research. We employ a theoretical framework built around agency and signaling considerations to identify factors that influence the probability and timing of post-IPO profitability of Internet IPO firms. We estimate Cox Proportional Hazards models to test whether factors identified by our theoretical framework significantly impact the probability of post-IPO profitability as a function of time. We find that the probability of post-IPO profitability increases with pre-IPO investor demand and change in ownership at the IPO of the top officers and directors. On the other hand, the probability of post-IPO profitability decreases with the venture capital participation, proportion of outsiders on the board, and pre-market valuation uncertainty.     

CSR Disclosure Items Used as Fairness Heuristics in the Investment Decision

The growth in demand for corporate social responsibility (CSR) information raises the question of how various CSR disclosure items are used by investors, an important stakeholder group driven by instrumental, moral, and relational motives. Prior research examines the instrumental motive to maximize individual shareholder wealth and the moral motive to actualize personal stewardship interests. We contribute to the literature by examining investors’ relational motive to realize positive stakeholder relationships within and between organizations and communities. The relational motive arises when investors look at a company’s treatment of other stakeholder groups as a heuristic to form a perception of how fairly they will also be treated by that company in the future, and thus invest in the company they perceive as fair. Fair treatment in the future matters to the investor who purchases stock from the company or via the capital markets in exchange for becoming a shareholder and thus a residual claimant of the company. As such, the investor expects future cash flows from holding and/or reselling the stock and expects to be treated fairly by the company in the future. We propose that investors, use as a fairness heuristic, CSR disclosure items—CSR investment level or CSR assurance—that represent the company’s commitment to its stakeholders, and that the resulting fairness perception affects the extent to which the CSR disclosure items influence their investment decision. Using responses from 113 investors in an online experiment, we find that fairness perceptions are higher when CSR investment is above (versus below) the industry average, and that fairness perceptions partially mediate the impact of the CSR investment level on investment amount allocations. We do not find that the presence (versus absence) of CSR assurance is used by investors as a fairness heuristic. Our results are robust to controlling for preferences for financial performance and hence investors’ instrumental motive, and to controlling for individual environmental attitudes, and hence investors’ moral motive. Implications for future research and public policy are discussed.     

After the cash arrives: A comparative study of venture capital and private investor involvement in entrepreneurial firms

Equity investments in entrepreneurial firms continue to grow in number and dollar amount from both venture capital and private investment sources. Increasingly, these two sources of capital play an important role in the development of new and existing entrepreneurial ventures. Due to the sometimes hurried attempt to turn their dream into reality, entrepreneurs may fail to consider similarities and differences in the value-added benefits supplied by venture capital firms (VCs) and private investors (PIs).Accordingly, the purpose of this study was to determine how initial relationships are established and maintained between entrepreneurs and their primary investors. Specifically, we asked entrepreneurs to assess characteristics of the relationship with their primary investor. We then contrasted the results between entrepreneurial firms that had received venture capital funding versus private investor funding. Differences were examined along the following lines:

• 1.• Levels of investor involvement in entrepreneurial firms
• 2.• Reporting and operational controls placed on the firm
• 3.• Types of expertise sought by the entrepreneur

     

On the Demand Elasticity of Initial Public Offerings: An Analysis of Discriminatory Auctions

We analyze 52 Taiwanese IPOs that were introduced through discriminatory auctions (you pay what you bid) between December 1995 and October 1998. The evidence suggests that the elasticity of demand for IPOs in Taiwan through discriminatory auctions is relatively flat. The elasticity is significantly negatively correlated with bidders’heterogeneity, which is consistent with the investor heterogeneity hypothesis. We also find that the average winning bidders earn a significant average abnormal return of 7.83% in the post–IPO market. The post–IPO market abnormal return is positively correlated with the demand elasticity, the idiosyncratic risk of stock returns and the institutional participation rate, and is negatively correlated with the auction clearing price, which is consistent with theory. Finally, there is evidence that informed investors have an incentive to shade their demand for IPOs to avoid the winner’scurse. The most aggressive bidders (the top 5% of the winning bidders) on average incur a small loss of 1.64% (not significant) in the market–adjusted initial returns.     

Earnings announcement timing,uncertainty, and volatility risk premiums

We examine the relationship between firms’ quarterly earnings report timing and uncertainty before quarterly earnings announcements. Prior research provides conflicting predictions on how investor uncertainty and report timing are related. Using implied volatilities from equity options and the realized returns to straddle positions, we find evidence that uncertainty and volatility risk premiums are higher for firms that report later in the quarter. Further tests show that the increase in option premiums is unexplained by risk factors suggesting a mispricing by investors. These results are not associated with static firm-level factors and our findings are concentrated in high growth firms.     

Socially Responsible Investing: An Investor Perspective

Given the growing importance of Socially Responsible Investing (SRI), it is surprising that there is no consensus of what the term SRI means to an investor. Further, most studies of this question rely solely on the views of investors who already invest in SRI funds. Our study surveys a unique pool of approximately 5,000 investors that contains both investors who have used SRI criteria in investment decisions and those who have not, and involves a broad array of criteria associated with SR investing. Our findings offer new insight into the SRI debate. For both sets of investors, environmental and sustainability issues dominate as the major category associated with SR investing. We find strong agreement in the ranking of the relative importance of various SRI factors despite differences between these two groups in their opinion of their overall importance. We also find that investors prefer to consider the SRI question in more holistic terms rather than using the exclusionary format favored by most SRI funds. Investors seem to prefer to reward firms who display overall positive social behavior rather than to exclude firms on the basis of certain products or practices. These findings can help providers of SR investment vehicles to improve the SRI products that they offer to the general investor, thus both encouraging the initial adoption of SR criteria by investors and increasing overall investment in SR choices.     

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.     

Strategically camouflaged corporate governance in IPOs: Entrepreneurial masking and impression management

Entrepreneurs attempt to persuade potential investors that their new ventures are both credible and worthy of funding. A long line of research on entrepreneurial impression management establishes that the ability to present their ventures in a favorable light is a key attribute of successful entrepreneurs. In this study, we examine the opposite side of the issue and test to determine if some entrepreneurs obscure corporate governance information. We create a new metric to measure the level of camouflage used in governance documents for initial public offerings (IPOs). We find that entrepreneurs are less likely to use camouflage during periods of high scrutiny, as measured by industry analyst following, industry concentration levels, and IPO clustering. We also find that greater use of camouflage is associated with raising more capital, due to both greater offer proceeds as well as less underpricing. This effect is most pronounced in corporate charters which are difficult for shareholders to change.     

Investment Patterns of Informal Investors in the Alberta Private Equity Market*

This study identifies three main types of informal investors in private equity markets: relationship investors, opportunity‐based investors, and angel investors. We find evidence that the first two investor types are a major total source of capital and they prefer to invest smaller amounts close to home and in the context of existing relationships. With respect to angel investors, we find evidence of stratification in their desired investment amount which is consistent with a model where their investments evolve though a life cycle of investing. We also find evidence that changes to capital market regulations that allow for lower investment amounts by this type of investor increase the amount of capital available for early‐stage firms.     

The impact of media coverage on IPO stock performance

This study uses signaling theory to examine the role of media coverage on IPO stock performance. Specifically, it investigates how coverage in credible financial media and the tone of media coverage about an IPO firm before and after its listing influence its stock performance. Results show that coverage in credible financial media about an IPO firm significantly impacts its stock price. Additionally, the findings show that uncertainty in the tone of media coverage about an IPO firm adversely influences its stock price. Overall, these findings contribute to signaling theory by addressing the impact of uncertain signals on investor behavior. Moreover, the findings reported in this study also contribute to the growing organizational literature on media by emphasizing the need for scholars to examine the content of media coverage, and specifically the role of uncertain media coverage, on firm-level variables.     

Does air pollution influence investor trading behavior? Evidence from China

Building on the research linking environmental factors to investor mood, we posit that there is a negative relation between air pollution and individual trading strategies. Through an analysis of unique individual transaction data, our results show that air pollution negatively influences individual investors' propensity to buy and positively influences investors' propensity to sell. We find obvious heterogeneity effects across different investor, stock and city characteristics. The effects are even larger for investors with less investment experience and for those living in heavily polluted cities. This study is crucial for establishing an association between air pollution and individual trading activities.     

Domestic versus foreign listing: Does a CEO's educational experience matter?

Where to list an initial public offering (IPO) is a critical decision for an entrepreneurial firm. Our study investigates IPO location choice between home country and foreign country by examining a sample consisting of the entire population of 1479 Chinese private issuers during the period from 2005 to 2014. We enrich upper echelons theory by bringing in the insights of imprinting theory. Our results indicate that the sources of imprint − prestigious domestic education and foreign education − influence CEOs' preference for an IPO location. More specifically, CEOs with prestigious domestic degrees tend to list their firms in China whereas CEOs with foreign degrees tend to list outside China. Given that the imprinting effects of education have a lasting influence on CEOs, despite subsequent environmental changes, long tenures allow such effects to be imparted to other top management team members. Another finding is that when the CEOs are also the founders, there are two separate imprinting effects.     

Signaling and initial public offerings: The use and impact of the lockup period

To reduce information asymmetries for potential investors considering investment in an IPO venture, owners can signal the firm's longer-term viability and quality in several ways. The lockup period, is one signal that can be offered. We investigated the lockup period of a sample of 640 ventures going through the IPO and find that a longer lockup period acts as a substitute signal to venture capital (VC) and prestigious underwriter backing. Furthermore, we find that ventures which have a going concern issue can reduce the amount of underpricing at the time of the IPO by accepting a longer lockup period.