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Do Executives' Backgrounds Matter to IPO Investors? Evidence from the Life Science Industry

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  • Jay Chok
  • Jifeng Qian

Abstract

In this study, we focus on the impact of senior executives' industry backgrounds on the amount of capital raised in the stock market. The primary contribution of the study entails applying the upper echelon theory to the initial public offering (IPO) phenomenon. Specifically, we hypothesize that the industry backgrounds of corporate executives affect the amount of capital that the firm raised in the primary stock market. We argue that the firm's future investment strategies are unobserved by the investors ex-ante and investors expect firms' investment strategies to be based on the executives' industry backgrounds. As a result, the executives' industry backgrounds influence the investors' expectations about what investment strategies the firm is likely to deploy. Furthermore, the above logic also suggests that executives of different industry backgrounds should prefer different investment strategies corresponding with demand for different amount of capital. As a result, we expect the industry backgrounds to covary with the capital raised from both the supply and demand perspectives. To test the hypotheses, we ran a reduced econometric model wherein the executives' background predicts the amount of capital raised. Regression analyses suggest that the capital raised is negatively associated with the number of senior executives with prior career experience in the healthcare and genomic sectors but positively associated with the number of senior executives with prior career experience in regulatory affairs. The results provide tentative support for the notion that investors infer corporate strategies from senior executives' industry backgrounds.

Suggested Citation

  • Jay Chok & Jifeng Qian, 2013. "Do Executives' Backgrounds Matter to IPO Investors? Evidence from the Life Science Industry," PLOS ONE, Public Library of Science, vol. 8(5), pages 1-13, May.
    • Handle: RePEc:plo:pone00:0060911
    DOI: 10.1371/journal.pone.0060911
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    References listed on IDEAS

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    Cited by:

    1. Philippe Gorry & Diego Useche, 2018. "Orphan Drug Designations as Valuable Intangible Assets for IPO Investors in Pharma-Biotech Companies," NBER Chapters, in: Economic Dimensions of Personalized and Precision Medicine, pages 305-334, National Bureau of Economic Research, Inc.

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