From Noise to Information: The Need for Signal Clarifiers in IPO Markets

Abstract

The ability of venture firms undergoing an initial public offering (IPO) to convey reliable governance signals to investors is often undermined by the risk of signal manipulation via “washing” by opportunistic firms. This study develops a theoretical model to demonstrate that engagement with a “Big Four” auditing firm enhances the credibility of governance signals associated with female board participation in IPO firms. We empirically evaluate the model’s theoretical predictions using robust analytical methods. Furthermore, we introduce a novel metric—IPO Efficiency—which integrates both IPO duration and total capital raised, offering a more comprehensive assessment of IPO performance. Our results show that undergoing IPO that hire “Big Four” auditors and have a more diverse board raise more money per day during the IPO window, particularly in periods of heightened IPO activity. These results offer valuable insights for pre-IPO firms evaluating the benefits of investing in premium auditing services and for investors assessing the relevance of governance signals in their IPO investment strategies.

Keywords: Initial Public Offering, Female Board Participation, Signaling, Performance of New Ventures