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

As the firm transitions into a publicly traded market for its stock, it faces challenges and opportunities it did not face as a privately held firm. TMT functional heterogeneity may signal to outside investors that the firm will be successful in the future for the following reasons. The benefits of TMT functional background heterogeneity found in established firms including environmental scanning alternatives, effective decision making, competitive action and response, strategic clarity, innovation, and creativity (Bantel, 1993; Bantel & Jackson, 1989; Glick et al., 1993; Hambrick & Mason, 1984; Hambrick et al., 1996; Lant et al., 1992; Murray, 1989; Roure & Keeley, 1990; Weinzimmer, 1997; Williams & O'Reilly, 1998) should also benefit newly public firms as they address the challenges and opportunities faced by publicly held firms. Heterogeneity may also provide the team with a broader perspective and diversity of information (e.g., Bantel, 1993; Glick et al., 1993; Hambrick, 1994; Hambrick & Mason, 1984; Williams & O'Reilly, 1998) in addressing these challenges and opportunities. In addition, a team experienced across functional areas (e.g., finance, human resources, marketing, operations, engineering) enables the firm to respond to challenges and opportunities more effectively than a team focused in one functional area (e.g., engineering). Furthermore, investors in IPO firms typically expect the firms to exhibit high growth, and as Eisenhardt and Schoonhoven (1990) demonstrated, a more functionally heterogeneous TMT can better address strategic opportunities and enable the firm to grow. Thus, it appears that heterogeneity in the top managers' functional background might provide a signal to potential investors about the quality of an IPO firm, and so a firm with greater heterogeneity in the functional background of the TMT will raise more capital through an IPO than firms with less heterogeneity.

Hypothesis 1: Heterogeneity in the TMT's functional background is positively related to the amount of capital raised at IPO.

Education

Education has been argued to indicate an individual's knowledge and skills (Hambrick & Mason, 1984) and to be related to the team's information-processing capacity (Bantel, 1993). Educational level reflects an individual's cognitive ability and skills (Wiersema & Bantel, 1992). Higher levels of TMT education were found to be related to greater levels of innovation (Bantel & Jackson, 1989; Kimberly & Evanisko, 1981; Wiersema & Bantel, 1992), to influence individuals' information processing and receptiveness to innovation boundary spanning (Bantel & Jackson, 1989), and to be positively related to strategic change (Wiersema & Bantel, 1992). Hambrick and Mason proposed that the type of education earned by the top managers influences their strategic decisions. Boeker (1988) extended this argument in the context of new firms by arguing that more highly educated entrepreneurs are more likely to emphasize technical innovation.

Heterogeneity in the educational backgrounds of the TMT has also been identified as an important characteristic. According to Bantel (1993), heterogeneity in the educational background of the TMT suggests variety in their perspective. It was found to be positively related to competitive action and competitive response (Hambrick et al., 1996), to strategic change (Wiersema & Bantel, 1992), to strategic clarity (Bantel, 1993), and to firm performance in established firms (Hambrick et al., 1996; Smith et al., 1994). Wiersema and Bantel interpreted their findings that TMT educational background heterogeneity is positively related to strategic change as support for the argument that "diversity in cognitive perspectives facilitates adaptation" (p. 114). Smith et al. argued that the positive relationship found between educational background heterogeneity and performance may be due to the creativity fostered by the heterogeneity. In addition, in addressing complex situations, such as an IPO, breadth in educational backgrounds may positively influence performance. Tihanyi, Ellstrand, Daily, and Dalton (2000) argued that in complex issues, a TMT "representing a broad and diverse educational base may be better equipped to deal with the wide range of relevant issues that must be considered" (p. 1165). Ensley et al. (1998) found that in new ventures, the TMT's educational background heterogeneity was negatively related to performance, concluding that this may be due to conflicts resulting from differences in the team, and the conflicts result in problems in implementing key decisions.

TMT educational background heterogeneity may also provide a signal to potential investors about future performance. TMTs with greater educational heterogeneity may be perceived as having greater performance potential because greater heterogeneity leads to greater diversity of information sources; an increase in variety of perspective, values, experience, and beliefs; cognitive benefits such as innovation, range of perspectives, and number and quality of ideas; as well as increased creative and innovative decision making (Bantel, 1993; Milliken & Martins, 1996; Tihanyi et al., 2000; Wiersema & Bantel, 1992). Educational heterogeneity may be perceived as better equipping the firm to deal with the breadth of issues to be considered (Tihanyi et al., 2000). A diverse set of educational backgrounds in the TMT signals that the TMT has breadth in its perspective and interpretations, as well as diversity in its cognitive base, which positively influence strategic decision making (Hambrick & Mason, 1984; Wiersema & Bantel, 1992). Thus, it appears that heterogeneity in the educational background of the TMT might provide a signal to potential investors about the quality of an IPO firm, and so a firm with greater heterogeneity in the educational background of the TMT will raise more capital through an IPO than firms with less heterogeneity.

Hypothesis 2: Heterogeneity in the TMT's educational background is positively related to the amount of capital raised at IPO.

Age

The age of the TMT members is another TMT characteristic that has been linked to the strategy and performance of the firm. According to Richard and Shelor (2002), age is a proxy for perspectives, belief systems, networks, and affiliations. Wiersema and Bantel (1992) argued that as people age their flexibility decreases and rigidity and resistance to change increases. Youthful mangers are commonly associated with attempting the risky, novel, and unprecedented (Boeker, 1988; Hambrick & Mason, 1984; Wiersema & Bantel, 1992), linked to firm growth (Child, 1974), and more receptive to change, and willing to take more risks than older managers (Wiersema & Bantel, 1992). Firms managed by younger top managers were less likely to experience firm crisis than firms managed by older top managers (Mudambi & Zimmerman Treichel, 2005). Boeker argued that younger entrepreneurs are better able to understand recent innovations.

Heterogeneity in the age of the TMT increases the variety of perspectives used in addressing strategic issues and expands the breadth of information, perspectives, and creativity, which positively relate to performance (Richard & Shelor, 2002; Wiersema & Bantel, 1992). Greater age heterogeneity in the TMT has been linked to improved firm performance (Kilduff et al., 2000; Richard & Shelor, 2002; Wiersema & Bantel, 1992). Williams and O'Reilly (1998) argued that age heterogeneity may provide greater access to a broader set of information and perspectives and so may enhance group decision making. But it may also make communication and social integration more difficult and conflict more likely. Some forms of conflict may be related to growth. For example, Ensley, Pearson, and Amason (2002) found that cognitive conflict (1) was related to cohesion among top mangers and that cohesion was positively related to growth in new ventures. Although Bantel (1993) argued that age cohort similarity promotes communication and consensus building and so a more homogeneous TMT with respect to age should be positively related to strategic clarity, she found little support for her argument.

TMT age heterogeneity may also provide a positive signal to potential investors for several reasons. First, age heterogeneity is associated with greater firm performance (Kilduff et al., 2000; Richard & Shelor, 2002; Wiersema & Bantel, 1992). Second, the variety of perspectives and creativity that TMT age heterogeneity provides indicates that the firm is better able to address strategic issues and so perform better than less heterogeneous firms (Richard & Shelor, 2002; Wiersema & Bantel, 1992). Third, when age is viewed as a proxy for perspectives, belief systems, networks, and affiliations (Richard & Shelor, 2002), heterogeneity in the top managers' age should provide a broader set of perspectives, belief systems, networks, and affiliations for the TMT to use in addressing the challenges faced by newly public firms. Thus, it appears that age heterogeneity might provide a signal to potential investors about the quality of the IPO firm and hence be associated with greater capital accumulation.

Hypothesis 3: Heterogeneity in the age of the TMT is positively related to the amount of capital raised at IPO.

Tenure Heterogeneity