CEO education and the ability to raise capital

Dimitrios Gounopoulos,Georgios Loukopoulos,Panagiotis Loukopoulos

doi:10.1111/corg.12338

Abstract

AbstractResearch Question/IssueUsing a unique hand‐collected dataset, this study examines the role of chief executive officer (CEO) educational attainments in relation to newly public firms.Theoretical/Academic ImplicationsUsing human capital, institutional and upper echelon theories, we hypothesize and demonstrate that CEO educational attainments do not unambiguously affect investors' perceptions of a firm's future prospects. Instead, their influence depends on the quality of CEO education as well as on the degree of uncertainty regarding the firm's future performance and the level of information asymmetry between issuers and prospective investors. To our knowledge, this is the first study that provides a comprehensive treatment of the role of CEO education in the IPO context.Research Findings/InsightsWe find that initial public offering (IPO) firms led by CEOs with superior educational credentials—in terms of level and quality—are associated with lower levels of IPO underpricing. This association is mainly driven by CEOs that hold advanced degrees. Notably, a difference‐in‐differences approach based on two quasi‐natural experiments indicates that the impact of CEO education on IPO underpricing is more pronounced within environments characterized by lower information transparency. The baseline results also hold in the longer term, thereby confirming the value of signaling prestigious academic awards at the time of the IPO.Practitioner/Policy ImplicationsOur evidence on the importance of CEO education, and especially that CEOs with varying levels and quality of educational training might differentially affect newly listed firms, is useful to providers of financial capital and boards of directors interested in assessing the viability of new ventures. The implication of our study for IPO investors is that it is worth paying more to take an equity position in firms run by better educated CEOs.

Highlights

Does it pay to invest in higher education? Numerous studies have extensively examined the effect of education on a variety of organizational outcomes such as innovation and strategic change (Barker & Mueller, 2002), mergers and acquisitions (Wang & Yin, 2018), and financial performance (Bennedsen, Perez-Gonzalez, & Wolfenzon, 2020; Chevalier & Ellison, 1999; King, Srivastav, & Williams, 2016; Li, Zhang, & Zhao, 2011; Miller, Xu, & Mehrotta, 2015)
Consistent with Loughran and Ritter (2004), we find that the presence of prestigious underwriters and venture capitalists (VCs) is associated with greater levels of initial public offering (IPO) underpricing, and to Gounopoulos et al (2017), we find that technology and Nasdaq-listed firms tend to have greater levels of underpricing
Our finding that the academic credentials affect the perceptions of IPO investors confirms our central hypothesis, that is, that chief executive officer (CEO) education is a crucial determinant of short-term IPO success

Summary

| INTRODUCTION

Does it pay to invest in higher education? Numerous studies have extensively examined the effect of education on a variety of organizational outcomes such as innovation and strategic change (Barker & Mueller, 2002), mergers and acquisitions (Wang & Yin, 2018), and financial performance (Bennedsen, Perez-Gonzalez, & Wolfenzon, 2020; Chevalier & Ellison, 1999; King, Srivastav, & Williams, 2016; Li, Zhang, & Zhao, 2011; Miller, Xu, & Mehrotta, 2015). Several studies show that the prestige associated with the educational background of a firm's upper echelons is favorably associated with the stock market's valuation of the newly public firm (e.g., Certo et al, 2001; Chemmanur & Paeglis, 2005; Cohen & Dean, 2005; Colombo et al, 2019; Higgins & Gulati, 2006; Lester et al, 2006; Zimmerman, 2008).4 While this line of research indicates that investors appear to reward firms that have high levels of educational prestige, it primarily focuses on the board of directors or the top management team, neglecting the role of the CEO—the most influential and most visible executive member (Hambrick & Mason, 1984). Dummy variables for Technology and Internet firms are incorporated into our model to account for the excessive underpricing that such firms experience (Loughran & Ritter, 2004)

| MAIN EMPIRICAL RESULTS

| CONCLUSION

Findings

26 There are eight Ivy League schools