Research Notes and Commentaries: Information Asymmetry and Investor Valuation of Ipos: Top Management Team Legitimacy

Posted: 4 Nov 2009

See all articles by Boyd D. Cohen

Boyd D. Cohen

Universidad del Desarrollo

Thomas J Dean

University of Colorado at Boulder - Leeds School of Business

Date Written: 2005

Abstract

Because information asymmetries exist between firm owners and prospective IPO investors, the legitimacy of the top management team (TMT) serves as an important signal of value to investors, who perceive legitimate TMT involvement as a credible indicator of the firm's economic potential. This proposition leads to the hypothesis that the legitimacy of a firm's TMT will be negatively related to IPO underpricing.This hypothesis was evaluated in light of data collected from 221 firms whose IPOs were executed between January 1998 and December 1999.Criteria were developed to assess the legitimacy of each firm's TMT.Most of these criteria involved the experience, education, and ages of the top managers.Regression analyses of the data reveal that TMT legitimacy is indeed associated with lower underpricing.The power of TMT legitimacy to account for underpricing may be attributed to the fact that investors view the TMT as a valid signal of firm value.Taken together, the data imply that the TMT selection process should focus on prior TMT experience, prior industry experience, and age.(SAA)

Keywords: Experimental/primary research, Legitimacy, Underpricing, Information asymmetry, Managers, Initial public offerings (IPO), Investors, Management teams

Suggested Citation

Cohen, Boyd D. and Dean, Thomas J, Research Notes and Commentaries: Information Asymmetry and Investor Valuation of Ipos: Top Management Team Legitimacy (2005). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1498291

Boyd D. Cohen (Contact Author)

Universidad del Desarrollo ( email )

School of Business
Ainavillo 456
Concepcion
Chile

Thomas J Dean

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
350
PlumX Metrics