Abstract
In this study, we focus on the impact of senior executives' industry backgrounds on the amount of capital raised in the stock market. The primary contribution of the study entails applying the upper echelon theory to the initial public offering (IPO) phenomenon. Specifically, we hypothesize that the industry backgrounds of corporate executives affect the amount of capital that the firm raised in the primary stock market. We argue that the firm's future investment strategies are unobserved by the investors ex-ante and investors expect firms' investment strategies to be based on the executives' industry backgrounds. As a result, the executives' industry backgrounds influence the investors' expectations about what investment strategies the firm is likely to deploy. Furthermore, the above logic also suggests that executives of different industry backgrounds should prefer different investment strategies corresponding with demand for different amount of capital. As a result, we expect the industry backgrounds to covary with the capital raised from both the supply and demand perspectives. To test the hypotheses, we ran a reduced econometric model wherein the executives' background predicts the amount of capital raised. Regression analyses suggest that the capital raised is negatively associated with the number of senior executives with prior career experience in the healthcare and genomic sectors but positively associated with the number of senior executives with prior career experience in regulatory affairs. The results provide tentative support for the notion that investors infer corporate strategies from senior executives' industry backgrounds.
Highlights
What do investors buy when they invest in start-up firms with no substantial assets-in-place? The short answer to the first question is that the investors are buying growth options
127 initial public offering (IPO) are in the pharmaceutical and biotechnology sector, 26 IPOs are in the analytical and genomic tools sector, 63 IPOs are in the medical devices and supplies sector, and 24 IPOs are in the healthcare sector
40 percent of the pharmaceutical/biotechnology firms and 35 percent of the analytical/genomic tools companies chose to go public during the hot issue years (1999 or 2000). 33 percent of the healthcare companies and 31 percent of the medical device companies went public during the hot issue years
Summary
What do investors buy when they invest in start-up firms with no substantial assets-in-place? The short answer to the first question is that the investors are buying growth options. We conjecture that investors infer the likely investment strategies and growth options that the firm will exercise based on the industry backgrounds of the firm’s executives. If the corporate executives’ industry background affects the type of investment strategies and growth options a firm is likely to exercise, we should expect industry backgrounds to correlate with capital raised. We test this conjecture by applying the upper echelon theory to the initial public offering (IPO) phenomenon. We develop specific hypotheses related to corporate executives’ industry backgrounds
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