Conveying Quality and Value in Emerging Industries: Star Scientists and the Role of Learning in Biotechnology
Matthew John Higgins
Georgia Institute of Technology - Scheller College of Business; National Bureau of Economic Research (NBER)
Paula E. Stephan
Georgia State University - Department of Economics; National Bureau of Economic Research (NBER)
Jerry G. Thursby
Emory University - Department of Economics
November 8, 2008
Managers of private entrepreneurial firms face obstacles in raising capital both in placing a value on a firm and conveying value to investors. These problems are exacerbated when the firm is small, has limited assets (except for human capital) and has yet to have a lead product. In such cases metrics are necessary to convey the value of the firm to investor. Here we explore the importance within the biotechnology industry of the non-financial metrics firms used to convey value during two important initial public offering (IPO) windows (1989 to 1992 and 1996 to 2000). We also examine whether there was a change over time in the importance of various metrics in determining the value of a biotechnology firm. We find that firms with an affiliated Nobel laureate succeeded in raising the value of their firms by more than $30 million compared to firms without a Nobel laureate during the first period, suggesting that a Nobel laureate served as a powerful signal of firm value. Our results also suggest that the biotechnology regime changed and the Nobel Prize lost its luster as a signal of value in the second period. The importance of several other non-financial metrics changed as well. We conclude that these non-financial metrics of value change in relative importance to potential investors and financial markets as learning occurs and as an industry matures.
Number of Pages in PDF File: 27
Keywords: Nobel laureate, biotechnology, signaling, initial public offering, regime change
JEL Classification: D80, G10, J33
Date posted: June 14, 2007 ; Last revised: November 18, 2014
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