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

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