CEO Social Capital and IPO Performance

Abstract

Initial Public Offering (IPO) outcomes are affected by the social capital of firm’s chief executive officer (CEO), proxied by CEO’s network centrality that identifies individual position within the hierarchy of all business executives worldwide. IPOs with CEOs who possess higher social capital are associated with higher underpricing, lower likelihood of offer price increases, and lower likelihood of positive wealth effects for pre-IPO investors. The results hold after controlling for personal characteristics, firm determinants of social capital, and direct relationships between IPO firm managers and underwriters. In addition, post-IPO insider sale trades initiated by CEOs with higher social capital are followed by significantly lower abnormal equity returns, and those CEOs are also less likely to be replaced following poor post-IPO long term performance. The influence and power derived from high social capital appears to allow CEOs to achieve greater entrenchment and personal benefits, which leads to increased risk of IPOs.

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

JEL Classification: G32, G40, L14