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To know and be known: Upper-echelons capital's effects on IPO performance with evidence from industries of contrasting levels of uncertainty

Eric Mitchell Jackson, 2002
Faculty Advisor: Donald C. Hambrick

Abstract

In this dissertation, I seek to understand why some firms that undergo an initial public offering (“IPO”) achieve higher levels of valuation at IPO and higher post-IPO performance compared to others, using the theoretical lenses of upper-echelons, human capital and social capital. Previous empirical work on IPOs has found environmental, industry, and firm factors related to IPO valuation, as well as evidence of the long-term underperformance of IPO firms compared to more mature firms (Ritter, 1984; 1991; Stuart, Hoang, and Hybels, 1999). However, this study represents one of the first to explore fully how a firm's management and board characteristics are linked to its IPO market capitalization and post-IPO performance. Based on upper-echelons theory, I argue that the firm's long-term operational and stock performance depend on the substantive abilities of the members of the firm's management team and board, measured as their combined human capital and social capital-what I call the firm's upper-echelons capital. I further argue that market actors will notice the differential levels of upper-echelons capital possessed by different firms and build the quantity of this firm resource into their IPO valuations of the firms. A firm's level of upper-echelons capital is also apparent to actors prior to its IPO; I propose that prestigious third-party actors, such as underwriters and venture capitalists, will be more likely to align themselves with a firm having a large stock of upper-echelons capital than one with a low stock. My model-based on upper-echelons, human capital and social capital theories-predicts a firm's level of upper-echelons capital affects the prestige of the third parties associated with a firm at IPO, consequently affecting its IPO valuation and post-IPO performance. I also argue that the effect of upper-echelons capital on these two dependent variables is even stronger when a firm is operating in an industry that is characterized by a high degree of uncertainty. I test my propositions on a sample of firms from two industries of varying uncertainty (computer software-defined as computer integrated designs and computer programming services firms-and hotel and restaurant chains) from 1994 to 1998. I find general support for my propositions positing a link between upper-echelons capital and short-term valuation and long-term firm performance-although different types of upper-echelons capital have differential performance effects. My propositions receive mixed support that there was a stronger link between upper-echelons characteristics and IPO valuation and post-IPO performance for firms from industries of greater uncertainty, depending on the type of upper-echelons capital. I find mixed support for my propositions of greater upper-echelons capital levels attracting prestigious third-parties which, in turn, positively influence short-term valuation and long-term performance. The most consistent upper-echelons capital characteristic that I find to affect IPO valuation and post-IPO performance is a top management team's amount of industry social capital. Although the upper-echelons capital characteristics do not universally predict higher IPO valuation and post-IPO performance, I find that they are highly significant predictors of these outcomes depending on certain threshold levels.

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