Signaling Type and Post‐IPO Performance

Abstract

Management research has examined how signaling at the time of an initial public offering (IPO) certifies firm quality and helps address the adverse selection problem for uninformed investors. We add to this literature by proposing a typology of signals based on whether the signal involves upfront cash investments (default‐independent) or whether it is meant to be a credible non‐cash commitment to suffer negative consequences should the firm underperform (default‐contingent). We also argue that this definitional distinction highlights differences in the underlying characteristics of these signal types in terms of cost, certifiability, clarity, consistency, commitment, and visibility. Using underwriter reputation and patents as proxies for default‐independent signals, and director ownership and founder status as proxies for default‐contingent signals, we find that only default‐independent signals improve post‐IPO firm performance.

Better Together? Signaling Interactions in New Venture Pursuit of Initial External Capital

“…Another type of signaling action new ventures may undertake to demonstrate their underlying quality involves managers taking on a credible commitment to suffer negative consequences in the future if the new venture does not deliver (Bhattacharya, 1979;Deb, 2013; Given the vast array of startups seeking early-stage financing, outside investors must look for blunt (i.e., highly observable) indicators of managerial commitment. One such signal may be whether or not the entrepreneur has gone beyond working from home and taken the added step of moving into commercial property (Brush, Greene, & Hart, 2001).…”

Corporate reputation in management research: a review of the literature and assessment of the concept

“…Venture capital firm reputation is most commonly measured by the firm's backed IPOs (e.g., Krishnan et al 2011;Nahata 2008). A central issue in this cluster is how underwriter reputation (e.g., Deb 2013;Fernando et al 2015;Su and Bangassa 2011) or venture capitalists' reputation (e.g., Krishnan et al 2011;Nahata 2008) is related to the success of IPOs.…”

Second‐Hand Signals: How and Why Firms Are Being Referenced in Scientific Publications

“…In the following, propositions outline the implications of references being a widely used second‐hand signal of product quality and firm performance, a signal that complements existing science‐based signals. Hereafter the overall more general complex signaling process is discussed in order to not just identify a new type of signal (Deb, ) in a certain context (Heeley et al ., ) but address the main question: under what conditions credible second‐hand signals are possible.…”

“…First‐hand signals are created by a given agent X that signals agent X to actor Y, illustrated by a start‐up that signals their own investment potential to venture capitalists through patenting or publishing activities. This framework has primarily led to research studying the sender of the signal (Long, ) and how receivers respond to different types of first‐hand signals (Helmers and Rogers, ; Deb, ) in the varying environment within which the signal is embedded (Podolny, ; Heeley et al ., ).…”