Initial public offering investor valuations: an examination of top management team prestige and environmental uncertainty.

Relying on one of the more notable entrepreneurial settings, an initial public offering (IPO), this article extends prior work on top management team (TMT) characteristics. We examine whether or not prestigious TMTs at the time of an IPO enhance organizational legitimacy and thereby provide a signal to potential investors. Because an IPO represents an entrepreneurial context characterized by high levels of uncertainty, we also consider the impact of environmental uncertainty on the TMT prestige/investor valuation relationship. We find that both an element of TMT prestige and environmental uncertainty influence investor valuations. However, we also find that the influence of prestige does not assuage investors when analyzing IPOs in different environmental conditions.

Introduction

The entrepreneurial context provides an excellent forum for investigations of the impact of top management team (TMT) on firm outcomes. Entrepreneurial firms are often dependent on a strong TMT to provide direction and resources that enable firm growth. As evidence of the importance of TMTs to growth-oriented firms, Kamm et al. (1990) suggested that investors value the quality of management team more than any other factor when making investment decisions.

Much of the TMT literature is based on Hambrick and Mason's (1984) proposition that organizations serve as reflections of their top executives. Therefore, firm outcomes might be considered a result of those who command the highest levels in the organization. This is particularly salient for entrepreneurial firms, where, as noted by Kamm et al. (1990), investors are likely to place a high value on the role of the TMT. Consistent with this empirical work in entrepreneurial settings, the literature has been supportive of executives' influence on organizational outcomes such as firm growth (Eisenhardt and Schoonhoven 1990), profitability (Smith et al. 1994), and strategic change (Wiersema and Bantel 1992).

In addition to any direct influence on firm processes and outcomes, top managers also fulfill a symbolic role with the firm's external constituents. To some extent, executives' actions and characteristics are signals to observers attempting to discern their intentions and predispositions. One indicator of TMT competence and skill is prestige (D'Aveni 1990). Consistent with this assertion, prestigious executives have been found to be positively associated with outcomes in larger corporations (for example, D'Aveni 1990; D'Aveni and Kesner 1993).