The effectiveness of founder signals and firm performance during the IPO process

Abstract

Purpose This paper aims to examine the impact of a firm’s governance characteristics on the signals released during the initial public offering (IPO) process. This paper focuses on the role of the firm’s founder and how different signals convey or diminish agency issues of adverse selection and moral hazard prior to IPO. This study also explores the performance impact (underpricing) of firm founder involvement on signal effectiveness. Design/methodology/approach This paper examines 122 firms during the IPO process to determine the influence that the founder’s presence, position and ownership has on signaling behaviors as well as on firm performance. Findings The authors find that founders influence how often the firm files amendments to the prospectus. Furthermore, the results suggest that agency-reducing signals are complicated and can interact to enhance either positive or negative signals that impact underpricing at IPO. Research limitations/implications The findings offer insights concerning how signalers can more effectively manage multiple signals that may interact negatively with firm characteristics. This study also provides contributions to both signaling and agency theories, discusses implications for practitioners and suggests opportunities for future research. Practical implications This has important implications for founders and managers of firms approaching IPO. The results suggest that founders are better off filing fewer addendums to their S-1 during the IPO process as this decreases underpricing. Underwriters and investors will be interested in these outcomes as identifying signals is an important factor when pricing firm valuation. Similarly, investors seek to identify firms that have a higher likelihood of underpricing because underpricing increases investor recognition and subsequent long-term impact on performance. Originality/value The findings offer insights concerning how signalers can more effectively manage multiple signals that may interact negatively with firm characteristics. The authors extend research in entrepreneurship and marketing by exploring indirect ways firms can communicate to investors using signaling, to increase value during the IPO process. This study provides contributions to both signaling and agency theories, discusses implications for practitioners and suggests opportunities for future research.