The Relationship between Boards of Directors and Initial Public Offerings in the Biotechnology Industry
Finkle, Todd A., Entrepreneurship: Theory and Practice
One area that has been receiving increasing attention by scholars and practitioners in entrepreneurship is the board of directors and its relationship to initial public offerings (IPOs) and corporate performance. The relationship between boards of directors and corporate financial performance has been investigated over the past five decades in such diverse disciplines as management, economics, finance, and sociology. Zahra and Pearce (1989) state, however, that this research has concentrated on the Fortune 500 population, while neglecting smaller, medium-size, and non-profit businesses, and specific industries. In addition, these studies have used samples of firms primarily in mature industries, failing to investigate board roles in other stages of firm or industry development. MacMillan and Katz (1992) have a call for entrepreneurship scholars to focus on the emergence of new industries and hot IPO markets.
This study attempts to fill a gap in both entrepreneurship and board research by investigating the relationship between the size and composition of boards of directors and both their initial offering size and aftermarket performance of IPOs in the emerging industry of biotechnology. Previous research (Rosenstein, 1987; Tashakori & Boulton, 1985) has shown that the size and composition of a board is important because it influences the quality of directors' deliberation and decisions. Board composition also affects directors' ability to provide strategic direction and performance (Baysinger & Hoskisson, 1990), and determines the ability of directors to control management to protect shareholder interests (Cochran, Wood, & Jones, 1985; Kesner & Johnson, 1990; Kosnik, 1990).
A number of researchers (see Churchill & Lewis, 1983; Flamholtz, 1986; Galbraith & Nathanson, 1978; Greiner, 1972) have studied the life cycle of organizations. The models usually progress from the start-up stage through various intermediate stages into mature organizations. Flamholtz (1986) states that firms pass through four stages of growth: new venture, expansion, professionalization, and consolidation. Stages one and two, taken together, make up the entrepreneurial phase of organizational development, while stages three and four make up the professional management phase (Clifford, 1973; Whisler, 1988). Daily and Dalton (1992a) term this transitionary stage the "threshold" of a firm, when the founder must begin to yield control of operations to other managers and subordinates. Typically, pressures created from firm growth dictate the onset of this transitionary stage (Whisler, 1988).
This study examines the biotechnology industry in the threshold or transitionary stage as equivalent to the transformation from privately held organizations to public identities. The transitionary stage of development can be equated with the "re-birth" or "restart" of organizations. This stage of development is of vital importance in board and small business research due to the requirement by the SEC of a board of directors during an IPO (Wang, 1991). More specifically, this research examines if the size and composition of the boards of directors is related to their initial offering size and aftermarket IPO performance for firms within the biotechnology industry.
The initial offering period is of vital importance to the biotechnology industry due to the capital-intensive nature of the industry. Lee and Burrill (1994) report that the average cost of development for a new drug is $125 million. Furthermore, Hamilton (1994) states that biotech companies need seven to ten years to bring a new product to market. Therefore, these firms tend to be resource dependent. They "are not able to internally generate either all the resources or functions required to maintain themselves" (Aldrich & Pfeffer, 1976). Due to the time lag between the introduction of products in the research pipeline and their actual introduction into the marketplace, biotech firms, at the time of their initial offering, need large amounts of capital to support their future research endeavors. …