Stacking the Deck : The Effects of Top Management Backgrounds on Investor Decisions

Argues that the top management team (TMT) of a firmcan serve as a powerful signal to investors that can in turn enable a firm togain legitimacy. First, a discussion of the relationship between organizationallegitimacy and the TMT is offered. Next, the signals of organizationallegitimacy in the initial public offerings (IPO) context are described, andseveral hypotheses are proposed. The first hypothesis suggests that TMT memberswith prominent upstream, horizontal, and downstream affiliations are likely toattract high numbers of quality institutional investors that invest in youngIPO firms. The remaining hypotheses propose that institutional investors areattracted to firms boasting high-prestige underwriters and to TMTs whosemembers' management backgrounds and roles are a close match. Data on the careerhistories of the 1,850 managing officers that comprise the TMTs of 299 publicbiotechnology firms are used to test the hypotheses. The data reveal that TMT affiliations with downstream organizations arelikely to attract high-profile investors; upstream and horizontal affiliations,however, produce no such effects. The findings also suggest that underwriterprestige is likely to secure investors' interest, as do TMTs whose toppositions are occupied by individuals with relevant role experience. The studyconcludes with a discussion of implications for researchers. (SAA)