How Does Ambiguity Influence IPO Underpricing? The Role of the Signalling Environment

Park, Haemin Dennis; Patel, Pankaj C.

doi:10.1111/joms.12132

Cited by 63 publications

(71 citation statements)

References 74 publications

(106 reference statements)

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“…As signalling theory has been applied to the organizational realm, the perspective has provided many rich insights, emerging as a mainstream theory in organizational studies (see Allison et al, 2013;Busenitz et al, 2005;Certo, 2003;Jones et al, 2014;Miller and del Carmen Triana, 2009;Nam et al, 2014;Park and Patel, 2015;Plummer et al, 2016;Reuer et al, 2012;Stuart et al, 1999). Specifically, because of the high levels of uncertainty and information asymmetry surrounding organizations (particularly emerging growth ventures), scholars have applied signalling theory logic to advance the idea that signals can be used as a mechanism for differentiating firms' quality.…”

Section: Signalling Theory and Organizational Evaluationsmentioning

confidence: 99%

Toward a Cognitive View of Signalling Theory: Individual Attention and Signal Set Interpretation

Drover

Wood

Corbett

2017

J Management Studies

156

161

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Research on organizational signalling tends to focus on the effects of isolated or congruent signals, assuming highly rational responses to those signals. In this study, we theorize about the cognitive processes associated with the attention paid to and interpretation of multiple, often incongruent signals that organizations send to consumers, financiers, and other stakeholders who make organizational assessments. Contributing a cognitive perspective of signal attention and interpretation, alongside the introduction of signal sets, we provide a more complete picture of how organizational signalling unfolds in the field. Our research opens new frontiers for future inquiry into the cognitive foundations of signal attention, multi‐signal interpretation, and incongruent signals.

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Section: Signalling Theory and Organizational Evaluationsmentioning

confidence: 99%

Toward a Cognitive View of Signalling Theory: Individual Attention and Signal Set Interpretation

Drover

Wood

Corbett

2017

J Management Studies

156

161

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“…There is significant evidence that the environmental context affects effective decision-making dynamics (Atinc & Ocal, 2014;Baum & Wally, 2003;Walters et al, 2010) and the perceptions that investors have about this process (Lester, Certo, Dalton, Dalton, & Cannella, 2006;Sanders & Boivie, 2004). Industry ambiguity, characterized by the uncertainty in foreseeing industry opportunities derived from the large amount of unknown information about supplier and customer markets and trends, the competitive environment, and in general "the meaning and implications of particular events and situations" (Santos & Eisenhardt, 2009), is one of the characteristics of the context that critically affect investors' perceptions (Park & Patel, 2015).…”

Section: Industry Ambiguitymentioning

confidence: 99%

“…However, a board with a diversity of PSEs across different industries may reduce the signs of myopic decisions (Beckman, 2006;Chung et al, 2015), mitigating investors' concerns about the existence of PSE between the CEO and the board. Further, the level of industry ambiguity may affect investors' perceptions about the requirements for effective decision making (Filatotchev & Bishop, 2002;Park & Patel, 2015) and thereby perceptions about the existence of PSE. There is consistent evidence that investors particularly focus on board resources (prior specific experience on the same industry/firm or in different industries/firms) and industry dynamics in making their investment choices (Acharya & Pollock, 2013;Chahine, Filatotchev, & Zahra, 2011;Filatotchev & Bishop, 2002;Filatotchev, Chahine, Wright, & Arberk, 2005;Sundaramurthy, Pukthuanthong, & Kor, 2014).…”

Section: Introductionmentioning

confidence: 99%

“…We also explore how the extent to which such PSE has been acquired in different industries-which we refer to as industry diversity of PSE-and the lack of clarity in industry opportunities-degree of industry ambiguity (Davis, Eisenhardt, & Bingham, 2009)-influence this relationship. We go beyond the mere exploration of the direct effect of PSE on IPO valuation motivated by the evidence that investors particularly focus on the backgrounds of the CEO and directors and industry dynamics in making their investment choices (Amason, Shrader, & Tompson, 2006;Filatotchev & Bishop, 2002;Li, 2008;Park & Patel, 2015;Rindova, Ferrier, & Wilbank, 2010).…”

Section: Introductionmentioning

confidence: 99%

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

Pérez‐Calero

Larrañeta

Wright

2019

Corporate Governance

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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.

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“…Research on IPOs has captured a lot of attention in recent years (e.g., Arthurs, Hoskisson, Busenitz, & Johnson, 2008;Bell, Filatotchev, & Aguilera, 2014;Leitterstorf & Rau, 2014;Park & Patel, 2015). However, despite the significant growth of studies on IPOs, the determinants of IPO performance are still not fully understood (Ljungqvist, 2007).…”

Section: Introductionmentioning

confidence: 99%

Product diversification strategy, business group affiliation, and IPO underpricing: A study of Chinese firms

Wang

Wan

Yiu

2018

Strategic Entrepreneurship

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Research Summary: Extant research has largely ignored if and how product diversification strategy influences IPO performance. We intend to fill this gap in the literature, especially in relation to transition economies where the role of diversification is institutionally bound. Specifically, drawing on the strategic actions and political connections arguments, we contend that the level of a firm's product diversification has a positive relationship with IPO underpricing. Given the prominent role of business groups in shaping firms’ diversification strategies in transition economy, we further examine whether business groups’ nonmarket capital—political, relational, and reputational capital—moderates the relationship between product diversification strategy and IPO underpricing. Managerial Summary: Due to the lack of transparency, investors in transition economies face higher ex ante uncertainties and have to bear more investment risks. As such, IPO firms have to “leave more money on the table” to compensate investors. This study aims to answer the question of whether and how an IPO firm's corporate strategy and business group affiliation affect investors' perceived uncertainties and, thus, the need to leave a large amount of money on the table to compensate investors. Using a sample of IPO firms in China, this study finds that the nonmarket capital that stems from business group affiliation helps mitigate the uncertainties investors perceive with higher levels of diversification, thus reducing the need for IPO firms to discount their offerings too much so that they can retain more wealth for business development.

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How Does Ambiguity Influence IPO Underpricing? The Role of the Signalling Environment

Cited by 63 publications

References 74 publications

Toward a Cognitive View of Signalling Theory: Individual Attention and Signal Set Interpretation

Toward a Cognitive View of Signalling Theory: Individual Attention and Signal Set Interpretation

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

Product diversification strategy, business group affiliation, and IPO underpricing: A study of Chinese firms

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