Signal Strength, Media Attention, and Resource Mobilization: Evidence from New Private Equity Firms

Abstract

Past research has shown that new firms can facilitate resource mobilization by signaling their unobservable quality to prospective resource providers. However, we know less about situations in which firms convey multiple signals of different strengths-i.e., signals that are more or less correlated with unobservable firm quality. Building on a sociocognitive perspective, we propose that prospective resource providers respond differently to signals of different strengths and that the effectiveness of signals, especially weak signals, will be contingent on the media attention new firms receive. Empirically, we conduct a longitudinal analysis examining the ability of new private equity (PE) firms to raise a follow-on fund. Consistent with our theory, we find that unrealized performance, a relatively weak signal, positively influences fundraising. But we fail to find statistical evidence that its effect is weaker than that of realized performance, a relatively strong signal. Further, media attention strengthens the relationship between unrealized performance and fundraising, but media attention exerts less impact on the relationship between realized performance and fundraising. Taken together, our findings deepen our understanding of how new firms can mobilize resources with signals of different strengths and of how the mediaas a key information intermediary-differently impacts their effectiveness.

The entrepreneurial finance markets of the future: a comparison of crowdfunding and initial coin offerings

“…When proponents signal their high quality (e.g., through human, social or intellectual capital), it reduces informational asymmetry and therefore increases the success of CF campaigns (Ahlers et al 2015). Signaling theory has largely focused on those signals that are assumed to be both observable and costly to imitate by low-quality firms, but signals can differ in the extent to which they are correlated with unobservable firm quality (e.g., Colombo et al 2019;Vanacker et al 2019). Indeed, a largely separate stream of literature has focused on entrepreneurial storytelling, which sometimes "re-present" the facts, and indicates that properly crafted stories can also serve as informational cues that foster entrepreneurial resource acquisition (e.g., Martens et al 2007).…”

Equity Crowdfunding: High-Quality or Low-Quality Entrepreneurs?

“…Thus, entrepreneurs use signals to mitigate information asymmetry. Signaling theory has established that signals must be costly to be effective (Akerlof, 1970; Bacharach, 1989; Connelly et al, 2011; Spence, 1973; Vanacker et al, 2019). Otherwise, low-quality entrepreneurs would adopt the same signals as high-quality entrepreneurs.…”

We Cannot Direct the Wind, but We Can Adjust the Sails: Prosocial Ventures’ Responses to Potential Resource Threats

“…Our study departs from existing work on resource mobilization and prosocial venturing in the following important ways. Previous research on resource mobilization has explained how new ventures signal their quality to potential resource holders (Moss et al 2015, Vanacker et al 2020, actively direct information about their operations through their social networks Cable 2002, Vissa 2012), and tell stories that are meaningful to resource holders (Martens et al 2007, Garud et al 2011) to access resources for their ventures. This stream of research has focused on activities to gain legitimacy primarily to access financial resources from selected groups of resource holders (Moss et al 2015, Clough et al 2019, Vanacker et al 2020.…”

“…As founders typically do not possess all necessary resources themselves, they rely on other individuals and organizations, such as investors, to help grow their ventures (George 2005, Kotha andGeorge 2012). This entrepreneurial resource mobilization requires venture founders to (1) search for resources by identifying where key resources reside (Grossman et al 2012); (2) gain access to resources by activating and broadening their networks of potential resource holders Cable 2002, Vissa 2012) and signaling high venture quality (Moss et al 2015, Vanacker et al 2020, for example, by telling meaningful stories to resource holders (Martens et al 2007, Garud et al 2011; and (3) transfer resources from resource holders (Aggarwal andHsu 2009, Clough et al 2019).…”