CEO Social Capital and IPO Performance

Abstract

Initial Public Offering (IPO) outcomes are affected by the social capital of the firm’s chief executive officer (CEO), proxied by the CEO’s network centrality that identifies the position of CEO within the hierarchy of all worldwide business executives. IPO firms with CEOs possessing higher social capital are associated with higher underpricing, lower likelihood of offer price increases from the initial filing range, and lower likelihood of positive overall net wealth effects for the pre-IPO investors. CEO social capital remains a significant determinant of IPO outcomes even after controlling for CEO personal characteristics, firm determinants of CEO social capital, and direct relationships between the IPO firm managers and the underwriters. In addition, the post-IPO insider sale trades initiated by CEOs with higher social capital are followed by significantly lower abnormal returns to firm equity, and those CEOs are also less likely to be replaced in case of poor post-IPO long term performance. All these results suggest that the influence and power derived from high social capital due to superior network centrality allows CEOs to insulate themselves from monitoring of their activities and to achieve greater entrenchment and personal benefits, which leads to increased risk of the IPO.

Keywords: Social Capital, IPOs, Underpricing, Social Networks, Centrality

JEL Classification: G32, L14