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

Second, I found educational background heterogeneity to be positively and significantly related to the capital raised through an IPO. The results suggest that TMT educational background heterogeneity may provide a signal to investors about the quality of the firm and its future performance potential. A diverse set of educational backgrounds in the TMT may signal 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). The positive and significant relationship of TMT educational background heterogeneity and IPO value is not surprising given the positive and significant relationship of TMT functional background and IPO value. Bantel (1993) argued that these two forms of heterogeneity are similar in that they each reflect cognitive diversity and create variety in the TMT's perspective. I did not find age heterogeneity to be significantly related to the capital raised.

Although age heterogeneity may reflect diversity in perspectives, belief systems, networks, and affiliations, it was not found to be significant in raising funds at IPO. Although Bantel (1993) argued that age homogeneity promotes communication and consensus building and is positively related to strategic clarity, she did not find a significant relationship. Research has demonstrated that younger teams are more advantageous to firm performance (Mudambi & Zimmerman Treichel, 2005), and so perhaps a younger rather than more diverse (i.e., age) TMT may be positively related to the amount of capital the firm raises through an IPO. Or it may be that age is not significant at the IPO stage. Age heterogeneity may influence performance at points in the firm's life cycle other than the IPO or forms of performance other than capital raised.

Tenure heterogeneity was not found to be significantly related to the amount of capital the firm raised through an IPO. The lack of significance of tenure heterogeneity in predicting the amount of capital raised at IPO may be due to the fact that on average, the firms in the sample have been in existence for approximately only 7 years. There is relatively little time for much tenure heterogeneity to develop. For many firms, in the early years of their existence, the management team is quite small. As the firm grows, managers are added. In preparing to take the company public, top managers are frequently added, some only months prior to the IPO, in an attempt to fill key top management positions in the TMT. The average team in our study was together for approximately only 1 year. The significance of tenure heterogeneity may be influenced by preparation for an IPO. Investors, therefore, might not rely upon tenure heterogeneity as a signal of the firm's future performance. The lack of significance of tenure heterogeneity supports the findings of Bantel (1993), who found that cohort relatedness in the TMT, i.e., tenure, was not significant in strategy-related decision outcomes.

It is interesting to note that similar to Bantel (1993) I found functional and educational heterogeneity but not age or tenure to be significant. Bantel argued that age and tenure indicate cohort similarity, which is important in promoting communication and consensus building. Education major and functional background heterogeneity indicate variety of perspectives. Bantel found variety of perspective (i.e., educational major and functional background) to be significantly related to strategic change but found little support for the relationship of cohort similarity (i.e., age and tenure) to strategic change. She suggested that in strategic decisions, the effects of cohort similarity are less important than the effects of cognitive diversity.

It appears that the benefits of cognitive diversity, with its

concomitant breadth of perspective, attention to a variety of firm

subenvironments, and thorough consideration of alternatives, are

most critical in the team's achievement of a clear strategic

direction. Such diversity ensures the variety of perspective that

stimulates a more thorough and creative approach to strategic

decision making (1197).

These findings are interesting in light of the great uncertainty surrounding an IPO, especially the IPO of a young firm. The quality of the firms at IPO is uncertain. The firm has no history in a public market. In addition, the profitability and growth of a young firm is uncertain, especially after transitioning from privately to publicly held equity. The functional and educational heterogeneity appears to signal investors that purchasing equity in the IPO firm is a good investment. The breadth of perspective provided by such heterogeneity appears to signal that the firm is positioned to perform well in the future. Many have argued that diversity in the TMT is desirable and that teams should learn to examine different perspectives to improve their decision quality (Amason & Sapienza, 1997).

In addition to a broad perspective, the heterogeneity may also provide a broad network and social ties from which the TMT can draw on to secure resources including capital. Networks and social ties have been shown to benefit the start-up of firms (Shane & Cable, 2002; Stuart et al., 1999). At the IPO stage, however, the significant role of institutional investors and large investors may limit the impact of the TMT' s network and social ties in raising capital.

Seven control variables were found to be positively and significantly related to the capital raised at IPO in the full model, i.e., year of IPO, hot market, TMT size, equity raised, prior sales, underwriter reputation, and VC backing. The positive relationship of year of IPO and capital raised at IPO suggests that as the industry develops, firms operating in the industry benefit from the industry's legitimacy (Zimmerman & Zeitz, 2002). One such benefit is the ability to raise capital. The significance of the hot market variable supports research on hot markets, i.e., firms that go public during periods when a large number of firms go public can raise more equity than firms that go public during periods when fewer IPOs occur (Deeds et al., 1997, 2004; Ritter, 1984). The significance of TMT size supports research indicating that TMT size is related to performance of firms at IPO. The significance of equity raised and prior sales suggests that the percentage of equity sold at IPO and the performance of the company prior to IPO influence the capital raised at IPO. The significance of underwriter reputation and VC reputation supports prior research that the reputation of the underwriter and VCs is beneficial to IPO performance (Beatty & Ritter, 1986; Brav & Gompers, 1997; Chang, 2004; Gulati & Higgins, 2003; Lange et al., 2001; Lin, 1996; Megginson & Weiss, 1991).

One control variable was found to be negatively related to IPO capital raised--team tenure. The negative relationship suggests that firms with a longer tenured team raise less money than those with shorter tenured teams. Perhaps this is because the addition of team members prior to the IPO enables the firm to raise more capital--firms that can add members to create a more balanced team can raise more money. As I noted earlier, firms preparing for an IPO typically add top managers to the team prior to the IPO. In this study, I found that the average length of time that the complete team has been in place is just under 1 year, which supports the idea that firms often add top managers to strengthen the team.

Conclusion

The research question addressed in this paper is, "Does TMT heterogeneity influence the amount of capital the firm raises through its IPO?" The answer to the question found in this study is yes, TMT heterogeneity does influence the amount of capital raised through an IPO. This finding extends the literature on TMT heterogeneity and on IPOs. In light of the wealth of research on TMT heterogeneity of established firms, I extended the literature to firms undergoing an IPO. I viewed heterogeneity as a signal that the firm is a good investment and argued that the advantages associated with heterogeneity, i.e., breadth of perspective, experience, knowledge, insight, etc., will positively signal that the firm is a good investment and will result in a larger offering. As has been argued and demonstrated (Carpenter, 2002; Hambrick, 1994; Hambrick et al., 1996; Milliken & Martins, 1996; Priem, 1990; Richard & Shelor, 2002), the context in which TMT heterogeneity is examined is important. The specific context I examined is the IPO. In the transition from a privately held to a publicly held company, heterogeneity was found to significantly influence the amount of capital the firm raises through an IPO. Thus, I support the argument that in the context of an IPO, a heterogeneous TMT is significant.