Management Quality, Venture Capital Backing, and Initial Public Offerings
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2012-05-04
In the paper, Management Quality, Venture Capital Backing, and Initial Public Offerings, which was recently made publicly available on SSRN, we use hand-collected data on the quality and reputation of the management teams of a large sample of 3,240 entrepreneurial firms going public during 1993-2004 to conduct the first large-sample study of the relationship between VC-backing and management quality and the effect of these two variables on a firm’s IPO characteristics and valuation, post-IPO financial policies, and post-IPO operating performance. We hypothesize that VC-backing positively affects the quality of a firm’s management team, and that both management quality and VC-backing play a certifying role in conveying a firm’s intrinsic value to the financial market, reducing the information asymmetry faced by it.
Our empirical findings are as follows. First, we find that overall VC-backed firms have higher quality management teams compared to non-VC-backed firms. In particular, VC-backed firms have a greater percentage of management team members with MBA degrees, a greater percentage of managers with prior managerial experience, a greater percentage of managers in core functional areas (operations and production, sales and marketing, R&D, and finance), and larger management teams compared to non-VC-backed firms. At the same time, VC-backed firms have lower percentages of management team members who are CPAs and who have prior managerial experience at law and accounting firms; further, their managers have shorter average tenures and smaller heterogeneity in these tenures.