Initial public offering valuation and prior shared experience in the boardroom of threshold ventures: A study of industry effects

Abstract

Research question/issue We explore the following question: How do initial public offering (IPO) investors value the existence of prior shared experience (PSE) between the CEO and the board of threshold ventures? Research findings/insights Building on the resource provision role of the board, signaling, and the dynamics of decision making within teams literatures, our results show that extensive PSE between the CEO and the board is detrimental to IPO valuation because it augments the perceived risk of overconfidence and myopic decisions sending negative signals to investors. Yet, the industry diversity of that PSE and the level of industry ambiguity mitigate such negative signaling effects. Theoretical/academic implications We make three main contributions to the literature. First, we make a specific contribution by advancing that extensive PSE between the CEO and the board is detrimental for IPO value, unless it is mitigated by the diversity of such PSEs across different industries. Our results therefore highlight boundaries within which previously accepted findings about the positive relationship between PSE and new venture performance do not hold. Second, we enrich our understanding of the relationship between board design and industry conditions by showing that investors perceive differently the extensiveness of PSE between the CEO and the board depending on the degree of industry ambiguity. Overall, we move beyond prior research on signaling, which has tended to focus on primary intended and costly signals, exploring signals with potential negative effects at IPO. Practitioner/Policy Implications Our research has practical implications for ambitious entrepreneurial ventures trying to achieve high growth by going public in their early stages of development. Board compositions may commonly be transformed ahead of IPOs to send a signal to the potential investors about their effectiveness in meeting the strategic challenges of being in the public arena. Our findings suggest that entrepreneurs, pre‐IPO investors, and their advisors may need to adopt a fine‐grained approach to constructing effective boards at an early stage.

What drives the valuation of entrepreneurial ventures? A map to navigate the literature and research directions

“…However, other scholars presented some contradictory results, showing that human capital sometimes has a dark side. For example, Pérez-Calero et al (2019) find that firms obtain lower valuations at IPO when their CEOs have previous shared work experience with board members, especially if they are in the same industry as the focal firm, as prospective investors perceive a higher risk of overconfidence and myopic decisions. Building on agency and resource dependence theories, Bertoni et al (2022) document an inverted U-shape relationship between the value of initial public offerings and the extent of board independence.…”

Board diversity’s antecedents and consequences: A review and research agenda

“…Veltrop et al (2017) underline that directors' financial expertise positively impacts their social status and conformity within the board, while directors' industry-specific expertise does not. Moreover, Pérez-Calero et al (2019) show that the diversity of experience between the CEO and the board mitigates the relationship between the extensiveness of prior shared experience and IPO valuation.…”

Taking stock of corporate governance research and future research opportunities

“…The international scope of corporate governance research is indicated by the diverse set of governance environments studied in recent CGIR articles that include Australia, Canada, China, Germany, India, Indonesia, Iran, Italy, Japan, Korea, Russia, Spain, Sweden, Taiwan, the United Kingdom, the United States, and Vietnam, as well as multicountry studies (e.g., Deloof, Du, & Vanacker, 2020; Desender, LópezPuertas‐Lamy, Pattitoni, & Petracci, 2020; García‐Sánchez & García‐Meca, 2018; Lazzarini & Musacchio, 2018; Qian, Cao, & Cao, 2018; Tribó, 2019; Zhou & Guillén, 2019). Corporate governance research is by no means restricted to the average publicly held corporation but also deals with the unique challenges associated with specific types of firms like, for instance, audit firms (La Rosa, Caserio, & Bernini, 2019), banks (Sheedy & Griffin, 2018), business groups (Shin, Hyun, Oh, & Yang, 2018), closely held firms (Russino, Picone, & Dagnino, 2019), declining firms (Abebe & Tangpong, 2018), entrepreneurial ventures (Pérez‐Calero, Larrañeta, & Wright, 2019), family firms (Yeh & Liao, 2019), foundations (Thomsen, Poulsen, Børsting, & Kuhn, 2018), institutional investors (Semenova & Hassel, 2019), intergovernmental organizations (Federo & Saz‐Carranza, 2018), initial public offerings (IPOs) (González, Guzmán, Tellez‐Falla, & Trujillo, 2019), as well as state‐owned enterprises (Apriliyanti & Randøy, 2019). This research intensity demonstrates the spread of corporate governance studies in multiple disciplines but also leads to higher levels of fragmentation of the field.…”

“…. Corporate governance research is by no means restricted to the average publicly held corporation but also deals with the unique challenges associated with specific types of firms like, for instance, audit firms (La Rosa, Caserio, & Bernini, 2019), banks (Sheedy & Griffin, 2018), business groups (Shin, Hyun, Oh, & Yang, 2018), closely held firms (Russino, Picone, & Dagnino, 2019), declining firms (Abebe & Tangpong, 2018), entrepreneurial ventures (Pérez-Calero, Larrañeta, & Wright, 2019), family firms (Yeh & Liao, 2019), foundations (Thomsen, Poulsen, Børsting, & Kuhn, 2018), institutional investors (Semenova & Hassel, 2019), intergovernmental organizations (Federo & Saz-Carranza, 2018), initial public offerings (IPOs) (González, Guzmán, Tellez-Falla, & Trujillo, 2019), as well as state-owned enterprises (Apriliyanti & Randøy, 2019). This research intensity demonstrates the spread of corporate governance studies in multiple disciplines but also leads to higher levels of fragmentation of the field.…”