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.