Dual Signals: The Effect of Firm Publications on Venture Capital Financing

Abstract

This paper investigates how the firm publications affect their VC financing. With information asymmetry about the quality of entrepreneurial ventures, investors are influenced by the signal of firm publications. However, firm publication can be a positive signal for the in-depth scientific knowledge and can be a negative signal for the knowledge leakage. Thus, this paper examines the effect of firm publications as “dual signals” in the VC financing context, and I argue that the positive or negative signaling effect of firm publications depends on the focal signal characteristics (journal quality) and other relevant signals (firm patent). When journal quality is high, publications are unambiguously positive signals to VC investors, and firm patents have a substitute effect with firm publications in top journals on the VC financing. However, publications in non-top journals send ambiguous signals, and firm patents would influence the sensemaking process of investors. Specifically, firms with more publications in non-top journals are perceived positively to VCs when firms do not have patents, but such publications would be a negative signal when firms have patents. Using the sample of around 1000 US biotech and pharmaceutical firms founded after 1980, findings support all the hypotheses.