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.     

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.     

Not Good,Not Bad: The Effect of Family Control on Environmental Performance Disclosure by Business Group Firms

In this study, we examine the influence of senior leadership on firms’ corporate social responsibility (CSR). We integrate upper echelons research that has investigated either the influence of the CEO or the top management team (TMT) on CSR. We contend that functional experience complementarity between CEOs and TMTs in formulating and implementing CSR strategy may underlie differentiated strategies in CSR. We find that when CEOs who have predominant experience in output functions are complemented by TMTs with a lower proportion of members who have experience in output functions, there is a pronounced effect on the community, product, and diversity dimensions of CSR. In turn, when output-oriented CEOs are complemented by output-oriented TMTs, we observe an effect on the employee relations dimension of CSR. Interestingly, we find no influence of CEO-TMT complementarity on the environment dimension of CSR. In general, our empirical results support the relevance of the interaction between CEOs and their TMTs in defining their firms’ CSR profile.     

Does corporate hedging affect firm valuation? Evidence from the IPO market

Focusing on the IPO market, we examine the influence of corporate hedging on firm valuation. Consistent with the argument that hedging reduces information asymmetry, we find that hedging IPO firms are associated with lower price revisions and underwriting fees. More important, hedging reduces IPO underpricing, especially for informationally opaque firms. This provides strong evidence that corporate hedging increases firm valuation. We also show that corporate hedging lowers aftermarket idiosyncratic volatility, enhances aftermarket liquidity, and improves the long-term performance of IPO firms. We use both an instrumental variable approach and a regulation change on derivatives supply to address endogeneity concerns.     

Predicting order and timing of new product moves: the role of top management in corporate entrepreneurship

In this study, we focused on new product move as a form of corporate entrepreneurial activity. We developed hypotheses relating the characteristics of the top management team (TMT) to the order and timing of new product moves made by firms. We analyzed 223 new product introduction moves from the personal computer, long distance telecommunication, and brewing industries from the period of 1975–1990. We found that firms with larger TMTs were more likely to be first movers. The hypothesis that firms with larger TMTs are more likely to respond quickly to new product moves received marginal support. The hypothesis that TMTs more heterogeneous in terms of organizational tenure of executives are more likely to be first movers as well as earlier in the order of new product moves received marginal support. We found contradictory results with TMT organizational tenure and TMT educational background heterogeneity as predictors of order and timing of new product moves. Subsequently, we conducted industry-wise analysis that revealed important differences in this new product entrepreneurial activity across the three industries.     

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.     

Analysts' Strategic Distortion during IPO Waves

We study analysts' strategic distortion during different stages of initial public offering (IPO) waves. We find analysts affiliated with leading underwriters time the market and “speak in two tongues” in recommendations and forecasts when they balance between conflicting interests of corporate finance clients and brokerage clients. They are more optimistic than nonaffiliated analysts in recommendations, but not in earnings forecasts in the early stages of IPO waves. More positive recommendations help them win a larger share of the booming IPO business. This distortion is absent in the late stages of IPO waves. We also find that the market discounts strong‐buy recommendations from affiliated analysts in the early stages of IPO waves.     

The Effect of Venture Capital Investment—Evidence from China's Small and Medium‐Sized Enterprises Board

In this paper, we use a matched sample to empirically test the effect of venture capital investment on the companies listed on the Small and Medium‐Sized Enterprises Board in China. We find that Chinese venture capitalists neither add value to their invested firms in the initial public offering (IPO) process nor improve operating performance. Rather, compared with their non‐venture‐backed counterparts, venture‐backed firms are associated with a greater level of IPO underpricing and inferior operating performance both before and after IPO. Our findings in China support neither the certification/monitoring hypothesis nor the grandstanding hypothesis, but partly support the adverse selection hypothesis.     

Top management team characteristics and firm internationalization: The moderating role of the size of middle managers

This paper examines the influence of the top management teams' (TMTs) characteristics, including tenure and international experience, on the degree of firm internationalization. In addition, this study explores the moderating effect of the size of middle managers (MMs) on the relationship between the TMT characteristics and the degree of firm internationalization. This study use the information-process perspective to emphasize that MMs provide information processing capabilities that assist TMTs as they cope with the high information-processing demands of the strategic decision-making process in international markets. We test the hypotheses using a sample of listed manufacturing firms in the electro-optical and textile industries during the 2006–2010 period. The findings indicate that TMT tenure has an inverted U-shaped relationship with firm internationalization and TMT international experience has a positively affect the firm internationalization. Furthermore, we find that large MM size positively enhances the inverted U-shaped relationship between TMT tenure and firm internationalization.     

Whose firm is it anyway? Analyzing ownership effects on IPO performance

This study revisits current practice that ownership holding at IPO has a homogeneous impact on IPO performance. Using signalling theory, we develop and test a conceptual model explaining the relationships between the aggregated ownership structure and IPO price premium. We argue that aggregated ownership has a direct effect on issue price premium, and offer specific hypotheses on the effect of the shares sold during the offering by each type of owner on IPO performance. We use archival data from a sample of US firms that issued IPOs between 1996 and 2000 and find a significant direct effect of ownership configuration, namely, heterogeneity in effect of each ownership type on IPO performance as well as interaction effects between different ownership types. Copyright © 2013 ASAC. Published by John Wiley & Sons, Ltd.     

Disclosure of Downside Risk and Investors' Use of Qualitative Information: Evidence from the IPO Prospectus's Risk Factor Section

I use the context of a company's initial public offering (IPO) of equity securities as a capital‐market setting to empirically study the economic consequences of risk factor disclosures. Using data from Australian IPOs, I examine the relation of textual risk disclosures in the prospectus to initial underpricing. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. My results suggest that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. Collectively, my findings suggest that informative disclosures of downside risk are useful for investors to evaluate IPOs.     

Upper echelons and portfolio strategies of venture capital firms

In this study we analyze how the composition of the top management team (TMT) influences the portfolio strategy choice in venture capital (VC) organizations. We develop a model of risk perception to investigate how education and experience of TMT members impact whether VC organizations invest with a focus on early stage ventures or not, specialize or diversify across industries, and invest with a broad or narrow geographic scope.Evaluation of data on TMTs and portfolio strategies of 136 European VC firms revealed that VC firms with higher proportions of TMT members with science/engineering education and entrepreneurial experience more likely invest with an early stage focus. Furthermore, TMTs with more management education diversify their portfolios more across industries. Finally, the more international experience TMT members of VC organizations have, the broader the geographic scope of investees. We discuss the implications of our findings for the VC literature.     

Diversity & internationalization: The case of boards and TMT's

Using a mixed US and European sample where both the board and TMT units are analyzed at the same time, we test the variables age, tenure and functional background.We extend the information/decision making perspective (Williams & O’Reilly, 1998) to both TMTs and boards by analyzing them as separate but related entities. In line with our hypotheses we find a positive effect on internationalization for functional background diversity of both boards and TMTs.Contrary to our expectations longer TMT tenure and younger board age also have a positive effect on internationalization.     

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.     

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.     

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.     

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.     

Performance effects of international expansion processes: The moderating role of top management team experiences

This study investigates how experience of top management teams (TMTs) influences the performance effect of added cultural distance in international expansion processes. Taking a dynamic perspective, we focus on internationalization processes and the cultural distance that is added in expansion periods. We argue that a TMT's experience can help in coping with the complexities of added cultural distance. Based on information-processing theory, we hypothesize and find that international experience and shared team-specific experience of a TMT positively moderate the relationship between added cultural distance and firm profitability. We test our hypotheses based on cross-sectional time-series data on 3656 expansion steps of 80 German firms during the 1985–2007 period.     

The Effects of Information Disclosure and Board Independence on IPO Discount*

This paper examines the effect of strategic information disclosure and corporate governance on the stock market performance of initial public offering (IPO) firms in France. It argues that information disclosure and board independence mitigate agency problems between the IPO firm and investors, thus reducing the IPO discount defined as the difference between the offer price and the intrinsic value of the firm. However, extensive disclosure may damage the firm's competitive advantage and lead to a curvilinear (an inverted U‐shape) relationship between information disclosure and the IPO discount. Further analysis suggests that it is not necessarily the quantity of information, but rather the type of information, that causes the IPO discount to increase with the amount of disclosure.