The Relationship between Venture Capital Backing and the Top Management Team Quality of Firms Going Public and Implications for Initial Public Offerings

54 Pages Posted: 13 Mar 2012 Last revised: 18 Aug 2021

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Manish Gupta

Nottingham University Business School

Karen Simonyan

Suffolk University - Department of Finance

Hassan Tehranian

Boston College - Department of Finance

Date Written: September 1, 2017

Abstract

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.

Keywords: Top Management Human Capital; Venture Capital Backing; Initial Public Offerings

JEL Classification: G24, G30, G39

Suggested Citation

Chemmanur, Thomas J. and Gupta, Manish and Simonyan, Karen and Tehranian, Hassan, The Relationship between Venture Capital Backing and the Top Management Team Quality of Firms Going Public and Implications for Initial Public Offerings (September 1, 2017). Journal of Business Venturing, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2021578 or http://dx.doi.org/10.2139/ssrn.2021578

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Manish Gupta

Nottingham University Business School ( email )

University of Nottingham
Jubilee Campus
Nottingham, NG8 1BB
United Kingdom

Karen Simonyan (Contact Author)

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States
(617) 973-5385 (Phone)

Hassan Tehranian

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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