The influence of top management team heterogeneity on the capital raised through an initial public offering.

When applied to organizations, signals attempt to reduce the subjective uncertainty of outside constituencies regarding the productivity and viability of the organization. Thus, the organization gives out partial bits of information that are meant to indicate to outsiders that relevant and important resources and capabilities are present or obtainable (Zimmerman, Zeitz, & Coombs, 2004). Such signals can include evidence of the TMT' s ability to manage the firm. As Clark, Cornwell, and Pruitt (2002) argued, "signaling theory revolves around the judicious use of signals that are consistent with the attainment or possession of a particular and valued attribute that, in the absence of the signal, would be very difficult to unambiguously convey" (p. 26). Because there is much information asymmetry and uncertainty surrounding an IPO (Certo, 2003), signaling theory may help us gain a greater understanding of actions firms take to improve their position vis-a-vis potential investors.

Specific signals found to influence IPO performance include VC backing (Barry, Muscarella, Peavy, & Vetsuypens, 1990; Brav & Gompers, 1997; Gulati & Higgins, 2003; Lin, 1996; Megginson & Weiss, 1991), underwriter reputation (Barry et al., 1990; Beatty & Ritter, 1986; Carter & Manaster, 1990; Daily et al., 2003), auditor reputation (Beatty, 1989; Daily et al., 2003; Titman & Trueman, 1986), prominent affiliations with organizations (Gulati & Higgins, 2003; Stuart, Hoang, & Hybels, 1999), firm size (Daily et al., 2003), corporate governance (Certo, 2003; Certo, Daily, & Dalton, 2001; Higgins & Gulati, 2003; Lester et al., 2006; Nelson, 2003; Sanders & Boivie, 2004), and equity retained by insiders (Certo, Covin, Daily, & Dalton, 2001; Daily et al., 2003; Downes & Heinkel, 1982; Filatotchev & Bishop, 2002; Fischer & Pollock, 2004; Gompers & Lerner, 1999; McBain & Krause, 1989).

The majority of the IPO signaling research focuses on underpricing as the dependent variable (Pollock et al., 2004). Three studies focused on the use of signals in raising capital (Deeds et al., 1997; Finkle, 1998; Sanders & Boivie, 2004). Because a key reason firms undertake an IPO is to secure resources to grow and survive (Daily et al., 2003; Deeds et al., 1997, 2004; Finkle, 1998; Nelson, 2003; Rasheed & Datta, 1997; Welbourne & Andrews, 1996), understanding the role that signals play in securing those resources, i.e., capital, is valuable to the study of IPOs.

In this paper, I build on the work of Certo (2003; Certo, Dailey, & Dalton, 2001) and Lester et al. (2006) and develop theory to suggest that a specific aspect of the firm that may provide a valuable signal to investors about its future prospects is the TMT's characteristics. In an effort to alleviate uncertainty as to the future performance of the firm, the firm presents its management team's characteristics as signals that the firm is structured for high performance, and investors use those signals in making their investment decisions (Certo, 2003; Certo et al., 2001; Lester et al., 2006). Thus, I expect that TMT characteristics may influence the capital raised through an IPO.

TMT Characteristics

Cyert and March (1963) first noted the importance of the TMT to the firm in their work on the dominant coalition. Later, Hambrick and Mason (1984) proposed their upper echelons perspective, a behavioral approach that treats the TMT as a significant influence on the direction and performance of the firm. In the upper echelons perspective, the attitudes, skills, values, and cognitive structures of the TMT are often cited as influencing the strategic choices of the TMT (Hambrick & Mason, 1984). A myriad of studies have since examined the characteristics of the TMT and their relationship to strategic decision making and firm performance (e.g., Bantel & Jackson, 1989; Hambrick, 1994; Hambrick et al., 1996; Wiersema & Bantel, 1992).

Although the predominance of the literature on TMTs is based on established companies, some literature has demonstrated the importance of the TMT characteristics in new firms (e.g., Boeker, 1988; Eisenhardt & Schoonhoven, 1990; Kamm, Shuman, Seeger, & Nurick, 1990; Lester et al., 2006; Macmillan et al., 1985; Mudambi & Zimmerman Treichel, 2005; Roure & Maidique, 1986; Siegel, Siegel, & MacMillan, 1993) including changes that take place in the TMT as the firm transitions through the life cycle (Clarysse & Moray, 2004; Hanks & Chandler, 1994; Kamm & Nurick, 1992; Lynall, Golden, & Hillman, 2003).

As the TMT literature developed, many characteristics of the TMT have been studied. One characteristic that attracted a great deal of attention is the heterogeneity of the team. Four measures of TMT heterogeneity have been explored--functional background, educational background, age, and tenure. These measures have been studied extensively but rarely have all four been studied together (Bantel, 1993; Murray, 1989; Pegels & Song, 2000). Published research offers support for the claim that a heterogeneous TMT makes better strategic decisions and is positively related to a variety of desirable outcomes, at least in established firms, including firm performance (Glick et al., 1993; Hambrick et al., 1996; Kilduff et al., 2000; Lyon & Ferrier, 2002; Simons et al., 1999). Although measures of TMT heterogeneity have been argued and found to influence performance in new and small firms (Amason & Sapienza, 1997; Eisenhardt & Schoonhoven, 1990; Ensley, Carland, & Carland, 1998; Macmillan et al., 1985; Roure & Maidique, 1986; Ucbasaran, Lockett, Wright, & Westhead, 2003), the findings are limited, and I found no research examining all four forms of TMT heterogeneity in new firms. The four heterogeneity measures "are complementary, reflecting diversity on somewhat different dimensions" (Hambrick et al., 1996, p. 672). Hence, in this paper I look at these four types of TMT heterogeneity as a group as well as individually.

Functional Background

The functional background of the top managers has been identified as an important characteristic of the TMT (Brouthers, Brouthers, & Werner, 2000; Hitt & Tyler, 1991). Although top managers are thought to have a generalist's perspective (Hambrick & Mason, 1984), it is often the case that these individuals have a functional specialization (Gupta, 1984). Hambrick and Mason argued that top managers have an orientation that develops from functional experience; this functional orientation may not dominate the strategic choices made, but it does influence decisions. Functional background was found to influence the strategic choices of firm founders in that they emphasize the function with which they have experience (Boeker, 1988). Brouthers et al. found that managers with functional experience in management pursued more aggressive strategies compared to managers with functional experience in finance and accounting.

Researchers have proposed that greater team member heterogeneity of functional backgrounds may increase the variety of environmental scanning alternatives, foster effective decision making, influence competitive action and response, and lead to innovation and creativity, all of which positively influence strategic decision making and firm performance (Bantel & Jackson, 1989; Glick et al., 1993; Hambrick & Mason, 1984; Hambrick et al., 1996; Lant, Milliken, & Batra, 1992; Murray, 1989; Roure & Keeley, 1990; Weinzimmer, 1997; Williams & O'Reilly, 1998). The impact of TMT functional heterogeneity in new ventures has also been examined. Roure and Maidique (1986) found that the breadth of functions represented on founding teams was important in accessing venture capital, i.e., early stage technology-based firms received VC funding when they had teams that were complete as to the functions of marketing, finance, operations, and engineering. Ucbasaran et al. (2003) argued that the functional background in the entrepreneurial founding team indicates the heterogeneity of "human capital necessary for venture development" (p. 112). Ensley et al. (1998) found heterogeneity in the TMT's functional background to be negatively related to performance (i.e., revenue) in new ventures.