Moderating Effects of Investor Experience on the Signaling Value of Private Equity Placements

Abstract

An examination is conductedof how afirm'schoice of investors conveys signals to the market. Private placements of equityare irreversible, occur after a more rigorous analysis than public offeringsprovide, contain governance mechanisms, and are transparent to outsiders. Thefirm's prospects are further endorsed by the perception of an investors'superior evaluative ability.Using Bioscan and the North CarolinaBiotechnology Center Actions Database, 329 U.S. biotechnology firms foundedbetween 1973 and 1998 are studied. Investor experience and variousfirm-and industry-level variables are tested for theirmoderating effects. Thedependent variable usedis rate of financing through private equityplacements or seasoned public offerings subsequent to the firm's initial publicoffering (IPO). Results indicate that investor experience helps attract subsequentfinancing. A negative interaction is found suggesting that prior investorexperience has a significant influence on attaining subsequent capital whenfirms have fewer private placements. Firms seeking capital when the industry ismore mature, younger firms, and firms having lower survival ratios are all morelikely to attract subsequent capital. Similarly, firms having larger IPOs,restricted private equity, and more alliance partners attract more capital.Endorsements are found to be most beneficial when there is greater uncertaintyabout firm quality. However, the endorsement effects of signals dissolve overtime. (NEE)

Keywords: Firm image, Initial public offerings (IPO), Public firms, Access to capital, Investors, Private equity, Firm financing, Biotechnology industry