The Role of Management Quality in the IPOs of Venture-Backed Entrepreneurial Firms

April 17, 2013 Leave a comment

The Role of Management Quality in the IPOs of Venture-Backed Entrepreneurial Firms

Thomas J. Chemmanur Boston College – Carroll School of Management

Karen Simonyan Suffolk University – Department of Finance

Hassan Tehranian Boston College – Department of Finance

April 4, 2013

Abstract: 
We make use of hand-collected data on the quality and reputation of the management teams of a large sample of entrepreneurial firms going public to analyze the role of management quality in the IPOs of venture capital (VC)-backed firms for the first time in the literature. We hypothesize that management quality may affect a VC-backed firm’s IPO characteristics and post-IPO operating performance through two channels: a “certification” channel, where firms with higher management quality face reduced information asymmetry in the IPO market, and therefore find it easier and cheaper to go public; and an “ability” channel, where firms with higher quality managements select better projects and implement them more ably. Further, VC-backing may itself affect a firm’s IPO, indirectly by affecting a firm’s management quality and directly through the above certification and ability channels. These hypotheses imply that VC-backing will be associated with higher management quality, and both management quality and VC-backing will have a favorable effect on firms’ IPO characteristics, increase IPO participation by financial market players, allow firms to go public earlier, yield higher IPO and immediate after-market valuations, and will be positively related to changes in post-IPO operating performance. Our OLS regression, propensity-score matching, and instrumental variable analyses provide empirical support for the above hypotheses. While VC-backing and management quality act as substitutes in their effect on a firm’s IPO characteristics, they act as complements in their effect on firms’ IPO and secondary market valuations and post-IPO operating performance.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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