TMT Functional Heterogeneity And IPO Underpricing

Initial Public Offering(IPO)is an important milestone in the growth process of a firm.For start-up businesses,successfully listed on the public means that company stock can flow in the secondary market freely,thus realizing the market value of the company.As a result,IPO process is one of the most important processes in the life circle of a company,and a lot of researchers focus on it.All along,the issue IPO-underpricing has attracted widespread attention.A systematic increase from the offer price to the first day closing price is the so called IPO underpricing.As market price can reflect the real value of the enterprise,high IPO underpricing would seriously harm the interests of the original shareholders of the listed company and the company itself.Actually,IPO underpricing exists in every capital market.In the Chinese capital market,the IPO underpricing is even higher.According to the study into Chinese Growth Enterprise Board in this paper,the average IPO underpricing is 34%.There is a list of possible explanations for underpricing.But the real one remains a puzzle.One way of classifying theories of underpricing is to categorize them on the basis of whether asymmetric information or symmetric information is assumed.Theories based on asymmetric information:signaling theory,winner's curse,negative cascade,and underwriter self-interest.Theories based on symmetric information:reduce legal liability.Other scholars from the perspective of behavioral finance,they believe that investors are bounded rational.Investor's speculation can also result in underpricing.This research is based on symmetric information.On the one hand,the investors are more informed than the issuer,cause they know about the general market demand for shares.With book-building,a preliminary offer price range is set,and then underwriters and issuers go on a "road show" to market the company to prospective investors.This road show helps underwriters to gauge demand as they record"indications of interest" from potential investors.On the other hand,the issuer is more informed than investors about company quality,so it's important for high-quality issuers to signal their quality from the pool of low-quality issuers.Some characteristics can be used to reveal signal,for example,the underwriter reputation,venture capital and top management team characteristics.Based on Certo and Lester's research,I think that top management team characteristics can be a signal to represent the legitimacy to investors.Hambrick and Mason in 1984 published the famous "Upper Echelons" theory,after that many scholars do research about how top management team influence organizational performance and strategic decision-making.But almost no investigate into how top management team affects the performance of the IPO,especially IPO underpricing.Zimmerman(2008)suggested that the heterogeneity of the top management team can affect the amount of capital the firm raises through its IPO.Besides,few scholars has explored Upper Echelons theory during the IPO process,especially start-ups as well as in high-tech enterprises or emerging industries.From the view of information processing,functional background heterogeneity is able to bring a company differentiated dispersed information.Only when information in the top management team has been fully exchanged and integrated,the benefits of top management team background heterogeneity can be released,thus sending signal to investors.The focus of Upper Echelons theory is top management team,but the CEO is not just a member in the group,as the leader of TMT and the whole company,CEO can guide the information exchange&integration process.Some characteristics contribute to the CEO ability of integration.This study includes three sets of CEO background characteristics:the CEO's own functional background expertise(i.e.functional generalist and marketing specialist),power base(i.e.status as founder),and shared experience with the other TMT members(i.e.team tenure).Therefore,based on the angle of the signal,in the process of research into the causes of the IPO underpricing,I suppose that top management team(functional background)heterogeneity can have a significant impact on listed companies IPO underpricing.Meanwhile,the CEO-TMT interaction is also very critical,that is,the relationship between TMT functional diversity and IPO underpricing is moderated by the characteristics of the CEO.As the main hypothesis,this research considers the top management team function background heterogeneity is significant positive related to IPO underpricing.TMT functional diversity might increase IPO underpricing when the CEO is a marketing specialist.Also TMT functional diversity might increase IPO underpricing when the CEO is founder.Research didn't find and significant moderation of CEO generalist and tenure.The contribution of this paper:Through the study of effects of Upper Echelons theory of the top management team heterogeneity on IPO underpricing,I introduced CEO characteristics as moderation.Despite the emphasis on the modern enterprise,the executive team on explaining organizational performance is more effective than CEO.But CEO is not just a member of top management team,his role cannot be replaced by any other members.Therefore,when considering the characteristics of the top management team,research may need to consider the impact of the CEO.The results also indicated that marketing specialist CEO and Founder CEO are able to pass a better quality signal to potential investors.