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Weekly UpdatesKnowledge is a fundamental asset for firms in our increasingly knowledge-based global economy (Sambamurthy and Subramani, 2005). The ability to create, acquire, and integrate knowledge has emerged as a critical organizational capability (Teece et al., 1997). The centrality of firm knowledge is reflected in the emergence of the knowledge-based view (KBV) to describe and explain competitive advantages in the marketplace and subsequent firm performance (Grant, 1996). Previous research has shown that firms in high-technology sectors are especially dependent on knowledge management capabilities due to the knowledge-intensive nature of new technologies (Steensma and Corley, 2000). Perhaps nowhere is this more evident than in new entrepreneurial ventures in high-technology industries because of all the unique uncertainties surrounding "entrepreneurial threshold firms" (Zahra and Filatotchev, 2004).
Given the relatively short operating history of entrepreneurial threshold firms and the asymmetric nature of the knowledge involved, it is especially difficult to evaluate the future value of an initial public offering (IPO) (Altman, 1988). Indeed, there is little conclusive information as to how entrepreneurial firms obtain informational advantages and how those advantages influence the economic value created as they "go public" (Zahra and Filatotchev, 2004). The purpose of this study is to explore a comprehensive set of knowledge-based capabilities of IPO firms in a high-technology industry to learn how superior knowledge impacts the market value created (i.e., IPO success). First, we develop five hypothesized predictors of IPO success. Second, we discuss our research design and methodology for testing the hypotheses. Third, we discuss our empirical results with the IPO sample (N = 103) that went public in 1997 in the computer industry. Finally, we discuss the implications of our study for practitioners in new venture areas and for the entrepreneurship literature.
THEORETICAL BACKGROUND
Economic Value Creations in Ventures
We define IPO success as the creation of market value above and beyond the resources invested in the venture since its inception. In this sense, it reflects a market valuation at the IPO that exceeds the initial value of assets employed by the venture. The creation of market value in ventures is possible in states of market disequilibrium, characterized by imperfect information (Cohen and Dean, 2005). Under the condition of perfect information, economic returns would be non-existent as payments for ex-ante resources or factors of production would reflect their value in the venture and therefore cause their prices to rise to the level of their ex-post value in the venture (Lippman and Rumelt, 2003). Under disequilibrium market conditions, uncertainty exists regarding the true value of resources in their use within a venture. In this sense, disequilibrium may also be viewed as a result of ex-ante limits to competition (Peteraf, 1993).
Such conditions enable the possibility that ex-ante prices of resources do not reflect their value in the venture and result in the possibility of created economic value. Imperfect information regarding possible venture outcomes is therefore a necessary ex-ante condition for the generation of venture success (in our case, IPO success). Additionally, the generation of economic returns requires that the venture successfully serves an under-exploited market opportunity. In other words, it is necessary that the entrepreneurial venture should serve an unmet need in the market or somehow serves a need more efficiently or effectively (Shane and Venkataraman, 2000). Rumelt (1987) referred to such outcomes as "socially efficient," arguing that the innovation embodied in the venture must be an efficient replacement for substitutes.
Given imperfect information, two factors are particularly important in determining whether an entrepreneurial firm effectively addresses that opportunity. The first is luck, as it is possible that entrepreneurs create new ventures in what may be seen as a random process wherein a few ventures chance upon a profitable market opportunity (Barney, 1986; Jacobson, 1992). Of course, the attribution of IPO success to a stochastic process is not particularly helpful in explaining or predicting the occurrence of economic returns, except to state that we would expect some unexplained variance in predictive empirical models and that the magnitude of unexplained variance is a question of considerable interest.
The second factor is the possession of superior knowledge regarding market opportunities (Kirzner, 1973; Shane, 2000; Shane and Venkataraman, 2000). Numerous authors have recognized the importance of various related entrepreneurial abilities including superior alertness, relevant education, and thoughtful anticipation of future conditions (Mises, 1949). However, Kirzner's (1973) ideas are probably the most explicit statements regarding the role of superior knowledge, as it is fundamental to his theory of entrepreneurship. According to Kirzner, widespread ignorance on the part of market actors creates opportunities for the discovery of such opportunities by alert entrepreneurs who possess superior knowledge. In short, the conceptualization of IPO success in the form of economic returns from the market implies that the possession of superior knowledge can play a role in the generation of such economic returns, above and beyond the role of luck or chance.
Unfortunately, gauging the existence of superior knowledge with respect to a given entrepreneurial opportunity is problematic because of a conceptual conundrum. If we, as researchers, were able to measure the ex-ante presence of superior knowledge with regard to a given opportunity, the condition of imperfect information implied by that opportunity would cease to exist and it would no longer he a source of economic returns. As a result, the best that we can hope for is the ability to gauge various factors which imply that an individual or group of individuals might possess such knowledge and thereby increase the likelihood that entrepreneurs would discover a given opportunity. Thus, the ex-ante presence of superior knowledge is an obvious predictor for economic return of ventures, such as IPO success. Specifically, previous research has demonstrated that investors consider the following criteria when making an IPO investment: (1) overall business potential, (2) composite quality of the top management team, and (3) level of competition (Parmar et al., 2000).
This line of research also suggests that, above and beyond ex-ante superior knowledge, there should be an additional mechanism built within a venture, which can serve as an ex-post impediment of competition in a market. Ex-post impediments to imitation may take a variety of forms and have been historically characterized as "frictions" in the market place (Knight, 1921). Rumelt (1987) presented them as "isolating mechanisms" and included a variety of factors such as property rights, information impactedness, response lags, reputation, and buyer-switching costs. We specifically paid attention to three of the most important of these isolating mechanisms in this study, namely intellectual property rights, organizational reputation, and contractual alliances with important external partners, as ex-post impediments to competition in a market.
In sum, we framed this study with two major constructs to explain IPO success--superior knowledge as ex-ante sources of competitive advantage and isolating mechanisms as ex-post impediments of competition in a market. This framework is a comprehensive, yet reasonably concise approach to describing and explaining IPO success.
Superior Knowledge and IPO Success
Shane (2000) argues that different pools of knowledge will allow entrepreneurs to discover market opportunities that others do not, and he showed that differences in knowledge impacted the discovery of entrepreneurial opportunities. Reinforcing this perspective, Jacobson states that the "existence of true entrepreneurial profit depends upon the possession of superior knowledge" (1992: 787). Regarding this construct, we theoretically assume that the salient knowledge within a firm is embedded within the top management team. Since the top management team can be constructively viewed as a reflection of the entire organization (Hambrick and Mason, 1984) and since investors have easier access to top managers, superior knowledge possessed by the top management team is a reasonable proxy for superior knowledge possessed by the overall firm. Also, from investors' perspectives, the top management team, in terms of members' industry experience, prior TMT experience, ages, and the level of education, is regarded as a very legitimate source of market signals (Cohen and Dean, 2005). In other words, the IPO event may be viewed as a means by which investors assess the expertise and competence of the top management team.
TMT Expertise. Knowledge comes from expertise, and expertise comes from one's educational and experiential background. Previous training or education in the nuances of technology and/or business best practices could translate into superior knowledge and knowledge creation capability (Smith et al., 2005). Indeed, Dimov and Shepherd (2005) recently found that the higher the levels of education of the top management teams within new venture firms, the higher the firm performance. Also, top management team's industry experience is often considered invaluable to new venture success (Smith et al., 2006). Finally, expertise gained in serving on a top management team is important in gaining an understanding into team dynamics and strategic decision-making (Auh and Menguc, 2006). In sum, we expect that the higher the TMT aggregate expertise, the greater the IPO success. This theory and research suggests our first hypothesis:
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