The Role of Management Quality in the IPOs of Venture-Backed Entrepreneurial Firms

60 Pages Posted: 4 Apr 2013

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Karen Simonyan

Suffolk University - Department of Finance

Hassan Tehranian

Boston College - Department of Finance

Date Written: April 4, 2013

Abstract

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

Chemmanur, Thomas J. and Simonyan, Karen and Tehranian, Hassan, The Role of Management Quality in the IPOs of Venture-Backed Entrepreneurial Firms (April 4, 2013). Available at SSRN: https://ssrn.com/abstract=2245374 or http://dx.doi.org/10.2139/ssrn.2245374

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/

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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