The Role of Management Quality in the IPOs of Venture-Backed Entrepreneurial Firms
60 Pages Posted: 4 Apr 2013
Date Written: April 4, 2013
We make use of hand-collected data on the quality and reputation of the management teams of a large sample of entrepreneurial firms going public to analyze the role of management quality in the IPOs of venture capital (VC)-backed firms for the first time in the literature. We hypothesize that management quality may affect a VC-backed firm’s IPO characteristics and post-IPO operating performance through two channels: a “certification” channel, where firms with higher management quality face reduced information asymmetry in the IPO market, and therefore find it easier and cheaper to go public; and an “ability” channel, where firms with higher quality managements select better projects and implement them more ably. Further, VC-backing may itself affect a firm’s IPO, indirectly by affecting a firm’s management quality and directly through the above certification and ability channels. These hypotheses imply that VC-backing will be associated with higher management quality, and both management quality and VC-backing will have a favorable effect on firms’ IPO characteristics, increase IPO participation by financial market players, allow firms to go public earlier, yield higher IPO and immediate after-market valuations, and will be positively related to changes in post-IPO operating performance. Our OLS regression, propensity-score matching, and instrumental variable analyses provide empirical support for the above hypotheses. While VC-backing and management quality act as substitutes in their effect on a firm’s IPO characteristics, they act as complements in their effect on firms’ IPO and secondary market valuations and post-IPO operating performance.
Keywords: Management Quality, Initial Public Offerings, Venture Capital
JEL Classification: G24, G30, G39
Suggested Citation: Suggested Citation