Academic journal article Journal of Small Business Management

An Empirical Study of the Impact of CEO Characteristics on New Firms' Time to IPO

Academic journal article Journal of Small Business Management

An Empirical Study of the Impact of CEO Characteristics on New Firms' Time to IPO

Article excerpt

An initial public offering (IPO) is one of the most critical events in the life of a firm. As the IPO market continues to attract attention from both entrepreneurs and investors, research examining the relationship between the firm's characteristics and its IPO performance is growing. In this paper, we use the upper echelon perspective to empirically examine the relationship between the firm's chief executive officer (CEO) and the firm's time to IPO, a relationship that has so far received little attention. Using data obtained from 237 IPOs in the U.S. software industry, we found that the CEO's prior executive experience, network, and age are significantly related to the new firms time to IPO. This study extends the understanding of the important role of the CEO in the IPO and provides investors greater insight into those variables that influence the speed with which firms go public.

Introduction

Since the 1960s, initial public offerings (IPOs) have been the focus of management research (Reilly and Hatfield 1969). As the number of IPOs has increased dramatically, the information surrounding the IPO has proliferated and management research on IPOs has surged dramatically. The WO is a very important event in the life of a firm. It transforms the firm from a privately held one into a publicly traded one allowing entrepreneurs, employees, venture capitalists, and other investors to cash out. An IPO provides funding for the firm to undertake new projects and enables its initial shareholders to diversify their holdings and supports firm growth (Deeds, DeCarolis, and Coombs 1997; McConaughy, Dhatt, and Kim 1995; Pagano, Panetta, and Zingales 1998; Sutton and Benedetto 1988; Welbourne and Cyr 1999). The IPO process is complex and lengthy and involves significant uncertainty (Daily et al. 2003).

An IPO can be considered to be a performance milestone indicating that "the firm is ready for further growth" (Chang 2004, p. 723). The time to IPO, measured as the time elapsed between incorporation and IPO, is important to both the firm and its investors. A short time to IPO provides a firm with capital to grow early in its existence. For a new firm time to IPO can be used as a measure of firm performance at a stage in the firm's life when many of the more conventional measures of performance, such as profit and sales, are not readily available (Chang 2004; Deeds, DeCarolis, and Coombs 1997). According to Douglas (1992), time is considered by investors in their assessment of investment attractiveness. Given two investments with the same return, the one with the shorter investment period is more desirable than the one with a longer investment period. VCs consider the speed with which a new firm goes public when calculating the return of an investment (Shepherd and Zacharakis 2001). Bygrave and Timmons (1991) found that when firms were able to go public within 34 months of their initial funding, they performed better than those that went public at a later point in their life. In addition, Beckman and Burton (2008) observed that firms operating in industries with a high number of IPOs go public faster than firms in other industries. Despite the importance of this phenomenon, the management literature examining the time to IPO is limited (Chang 2004; Clark 2002; Shepherd and Zacharakis 2001). The studies that do exist focus largely on the relationship of a firm's external factors and its time to IPO. For example, Shepherd and Zacharakis (2001) found that industry and market conditions are related to the time to IPO.

In this study, we extend the time to IPO literature by focusing on firm level characteristics, specifically the characteristics of the chief executive officer (CEO). We explore the relationship between CEO characteristics and the time to IPO. Prior research indicates that the quality and reputation of a firm's management affects various aspects of its IPO (e.g., Chemmanur and Paeglis 2005) and that the management serves as a protective shield for the firm in a transformational event such as the IPO (Fischer and Pollock 2004). …

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