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

Firm Age. Firm age is another frequently used control variable (Beatty, 1989; Beatty & Zajac, 1994; Finkle, 1998; Gulati & Higgins, 2003; Lester et al., 2006) and was measured as the total number of years that elapsed between the incorporation of the business and the date of the IPO. According to Finkle, age may provide an advantage in that older firms can acquire more information, resources, and experience, as well as establish more relationships.

TMT Size. According to Carpenter, Geletkanycz, and Sanders (2004), it is imperative that TMT heterogeneity studies control for TMT size. The positive association between heterogeneity and group size is well known (Allison, 1978). TMT size is an important aspect of TMT research (Sanders & Carpenter, 1998). Larger teams have been found to be linked to better performance and specifically to firm growth (Cooper & Bruno, 1977; Eisenhardt & Schoonhoven, 1990; Haleblian & Finkelstein, 1993; Hambrick & D'Aveni, 1992; Hoffman & Lheureux, 1997; Mudambi & Zimmerman Treichel, 2005). The size of the TMT has been shown to positively influence the performance of the firm at IPO (Deeds et al., 1997; Finkle, 1998).

Equity Raised. Because the amount of capital raised at IPO may be a function of the percentage of equity the company floats at IPO, percentage of equity raised is used as a control variable. Equity raised was measured as the ratio of total shares offered at the IPO to total shares outstanding (Mudambi & Zimmerman Treichel, 2005).

Prior Sales. As investors evaluate the decision to invest in an IPO, they consider the track record of the firm's revenue prior to the IPO, and so I included prior sales as a control variable. Prior sales were measured using the Total Revenue reported on the firm' s income statement for the fiscal year prior to the IPO date.

Team Tenure. Team age is used to measure the period the team worked together for. It is measured using the number of months (e.g., 11 months equals .92 year and 12 months equals 1.00 year) that elapsed between the last team member's hire date and the IPO date. A low number indicates that the team has a short tenure and may indicate the complete team was put into place to prepare for the IPO. A higher number suggests the team was put into place earlier in the firm's life cycle.

Underwriter Reputation. The reputation of the underwriter has been shown to be especially beneficial to IPO performance (Beatty & Ritter, 1986; Gulati & Higgins, 2003; Lange, Bygrave, Nishimoto, Roedel, & Stock, 2001). Underwriter reputation was measured using the index created by Carter et al. (1998), an update to Carter and Manaster's (1990) original index. The measure was based on investment bank positions in tombstone announcements where an underwriter' s status class was reversed coded and divided by the number of classes listed in the tombstone. The final index has a range of 0-9, where 0 represents the lowest reputation and 9 represents the highest rating. Positioning in tombstone announcements is widely recognized as an indicator of underwriter reputation (Pollock & Rindova, 2003) and has been widely used in finance and management research (Gulati & Higgins, 2003; Johnston & Madura, 2002; Podolny, 1994; Pollock & Rindova, 2003; Stuart et al., 1999).

VC Backing. VC backing has been argued and shown to influence the ability of the firm to raise capital at IPO (Brav& Gompers, 1997; Gulati & Higgins, 2003; Megginson & Weiss, 1991; Zimmerman & Zeitz, 2002), and the reputation of the VC firms backing the IPO firm has been shown to be related to IPO performance (Chang, 2004; Gulati & Higgins, 2003; Lange et al., 2001; Lin, 1996). One hundred eighteen of the firms in the sample had VC backing. Using Lange et al.'s list of top VC firms, I coded those firms that had a top VC investor as "1" and "0" otherwise.

Entrepreneurial Experience. The positive relationship of prior entrepreneurial experience of the TMT and firm performance has been shown (Colombo, Delmastro, & Grilli, 2004). Based upon Ucbasaran et al. (2003) I used Teachman's (1980) heterogeneity scale to measure entrepreneurial experience heterogeneity, where H = -[summation] Pi(lnPi) and i is the proportion of the group in the ith category. The categories used to calculate the index were: entrepreneurial experience in a firm other than the IPO firm (1) and no experience (0). Founder Experience. The positive relationship of founders serving on the TMT of IPO firms and firm performance has been shown (Nelson, 2003). Similar to Ucbasaran etal.'s (2003) measure of entrepreneurial experience heterogeneity, I calculated Teachman' s (1980) heterogeneity scale to measure heterogeneity of founder experience, where H = -[summation] Pi(lnPi) and i is the proportion of the group in the ith category. The categories used to calculate the index were: founder of the IPO firm (1) and not a founder (0).

Results

Table 1 presents the mean and standard deviation of the study variables, as well as the correlations among the variables. The mean IPO value in the sample was $24.52 million, the mean percentage of equity raised through the IPO was 25%, and the mean firm age was 7.34 years. Thirty-one percent of the companies went public in a hot market. The average team size was approximately seven members, and the mean tenure of the complete teams was approximately 1 year. Because I found a significant level of skewness and kurtosis in the prior sales and IPO value, I logarithmically transformed the variables.

The hypotheses were tested using hierarchical multiple regression analysis. To test the significance in predicting the IPO value of the independent variables over the control variables, I used a two-step hierarchical regression analysis. All of the control variables were entered in the first step. Then in the second step all of the independent variables were added to the base model.

Table 2 presents the results of the hierarchical regression analysis. Model 1 representing only the control variables (i.e., year of IPO, hot market, firm age, TMT size, equity raised, prior sales, team tenure, underwriter reputation, VC backing, founder experience, and entrepreneurial experience) was significant with an adjusted [R.sup.2] = .501 at p < .001 (F = 16.320). Seven control variables were positively and significantly related to IPO value: year of IPO (p < .01), hot market (p < .05), TMT size (p < .05), equity raised (p < .05), prior sales (p < .001), underwriter (p < .001), and VC backing (p < .05). Team tenure was negatively related to IPO value (p < .05).

The independent variables, i.e., TMT heterogeneity of functional background, educational background, age, and tenure were entered as a block in Model 2. The addition of the TMT heterogeneity variables to the equation with the control variables resulted in an improvement in the model. The adjusted [R.sup.2] was .526 at p < .05 (F = 19.443). The variance inflation factors (VIF) showed no indication of multicollinearity among the variables. The highest VIF statistic was 2.086, well below the rule of thumb level of 10 (Cryer & Miller, 1994). The results from Model 2 indicate that two types of TMT heterogeneity significantly add to my understanding of the prediction of the capital raised through an IPO beyond the control variables. Functional heterogeneity was positively and significantly related to the IPO value (p < .01), providing support for hypothesis 1. Educational heterogeneity was also positively and significantly related to IPO value (p < .05), providing support for hypothesis 2. Age and tenure heterogeneity were not found to be significantly related to capital raised. Thus, no support was found for hypotheses 3 or 4.

Discussion

The results of this study indicate that TMT heterogeneity is positively related to the amount of capital raised through an IPO. Specifically, the functional heterogeneity and educational heterogeneity were found to be positively and significantly related to the amount of capital the firm raised. Age and tenure heterogeneity were not found to be significantly related to the capital raised through an IPO. It appears that investors positively value breadth in the functional and educational backgrounds but not in age and tenure.

In preparation for an IPO, firms typically add top managers. They do this in hopes of raising additional funds because adding these new "talented" managers may help assure investors that the firm is a good investment and will succeed in the future. This study adds some support to these contentions and helps further explain what type of managers should be added. First, I found that functional background heterogeneity was positively and significantly associated with raising funds through an IPO. This suggests that adding new managers that complement as opposed to conform with existing managerial talent will lead to greater investor satisfaction and additional funds at IPO. Functional heterogeneity may signal to investors that the management team has the talent to handle multiple aspects of the environment instead of being myopic toward the technology, customer, regulators, suppliers, etc. In addition, a team experienced across functional areas is better able to respond to challenges and opportunities facing publicly held firms than a team focused in one functional area. Functional heterogeneity may provide the team with a broader perspective and diversity of information (e.g., B antel, 1993; Glick et al., 1993; Hambrick, 1994; Hambrick & Mason, 1984; Williams & O'Reilly, 1998) in addressing the complexities of publicly held firms.