Crisis Conditions and Performance of IPO Firms: Impact of Founder-CEOs and Foreign Listings

Abstract

IntroductionPeriodically, there exists a publicly-traded company that has the good fortune to have an entrepreneurial, visionary CEO that generates long-lasting, organic growth (Joel Shulman, Forbes, 2012).ENTREPRENEURS WHO ARE SUCCESSFUL IN growing their firm and securing financing for making an initial public offering (IPO) face the likelihood that they will be replaced by a professional manager (Wasserman, 2003). The literature shows that founders are replaced due to particular firm characteristics such as exceptionally high or low firm growth, the founder's functional background, and ownership structure (Boeker and Karichalil, 2002). Yet, entrepreneurs who are not replaced and become founder-CEOs of a publicly traded company tend to perform better than non-founders in the IPO process (Gao and Bain, 2011; He, 2008; Mousa and Wales, 2012; Nelson, 2003). Although founders do perform better in IPOs, little is known about how market conditions play a role in the relationship between founder and non-founder-CEO performance in IPOs.Market conditions have been indicated to affect multiple aspects of IPOs such as the number of IPOs being made (Pastor and Veronesi, 2005). Furthermore, investor sentiment changes with environmental conditions (Barberis et al., 1998). Investors are subject to representativeness, generalizing about a person or phenomenon with minimal information (Busenitz and Barney, 1997), as well as periods of conservatism and overconfidence (Barberis et al., 1998) depending on environmental conditions. It is reasonable to believe that changing market conditions and investor sentiment influence how founder-CEOs are received. Therefore, this paper seeks to address how varying environmental conditions affect IPO firm performance for founder and non-founder-CEOs.Investors, both individual and institutional, receive information about IPOs from various sources including financial analysts, investment banks (He, 2007), the media (Pollock and Rindova, 2003), prospectuses, company-released information, and other outlets. All information received forms a set of narratives in investors' minds about an IPO company. Narratives that we experience are how we make sense of and gain meaning (Weick and Browning, 1986) from our environment. Therefore, the narrative paradigm that considers how people deduce reality from a series of stories (Stutts and Barker, 1999) can help explain the reasons why investor sentiment changes towards founder and non-founder CEOs of IPO firms in different environmental conditions.Culture and origin also influence how narratives are formed and perceived. Therefore, narratives across cultures need to be considered in the relationship between founder-CEOs and IPO performance. Most often, researchers remove foreign IPOs from their studies and examine one particular market's (usually the United States) domestic IPOs (i.e. Gao and Bain, 2011; Mousa and Wales, 2012; Nelson, 2003). It is important to consider both domestic and foreign IPOs together because foreign listings are prevalent (Doidge et al., 2004) and increasing around the world. How environmental conditions play a role in the reception of foreign stocks with founder and non-founder CEOs also needs to be better understood so that management can time and strategize their public offering accordingly.To analyze different environmental conditions, two-year increments surrounding and during the 2007-2008 financial crisis will be examined. Precrisis, crisis, and two post-crisis periods will also be reviewed. Analyzing IPO performance in distinct market stages will indicate which characteristics determine success in each stage and how certain factors become more or less important over time.The motivations for conducting a study about founder-CEOs in domestic and foreign firms before, during, and after the most recent stock market crisis are both academic and practical. From an academic standpoint, a growing literature stream is interested in understanding how management influences the IPO process. …