Kellogg on Biotech

"Getting off to a good start: The effects of upper echelon affiliations on underwriter prestige and IPO success"

by Ranjay Gulati, Kellogg School of Management, Northwestern University, and Monica C. Higgins, Harvard Business School

The initial public offering (IPO) is one of the most critical events in the lifetime of a young firm. Prior research has shown that firms tend to have successful IPOs if they go public with the endorsement of a prestigious lead underwriter. This article takes one step back from prior research and examines the antecedents to receiving endorsement by a prestigious underwriter and links this to the experience base of a firm’s upper echelon. We theorize that the amount and type of upper echelon experience serve as important symbols of a young firm’s legitimacy to critical outsiders. We introduce a typology of upper echelon experience that distinguishes between upper echelon upstream, horizontal, and downstream employment-based affiliations and suggest that these different types of upper echelon affiliations allay different types of endorser concerns regarding firm legitimacy, affecting the endorsement process. Further, we theorize that the relationships between upper echelon experience and investment bank prestige will be moderated by technological uncertainty. As a logical extension to examining the relationships between upper echelon experience and underwriter prestige, we examine as well the extent to which upper echelon experience affects IPO success. We test our assertions on a comprehensive sample of public and private biotechnology firms that were founded between 1961 and 1994 and that went public between 1979 and 1996. Analyses of the five-year career histories of the over 3200 executives and directors that make up the upper echelons of these firms show that firms with upper echelons with affiliations with prominent downstream organizations (i.e., pharmaceutical and/or healthcare companies) and with prominent horizontal organizations (i.e., biotechnology companies) are more likely to attract the endorsement of a prestigious investment bank. We also find that the greater the range of upper echelon affiliations across the categories of upstream, horizontal and downstream affiliations, the more prestigious the firm’s lead underwriter. And, we find that these latter results are moderated by technological uncertainty. Our results on IPO success show that upper echelon downstream affiliations and range of affiliations do have some direct effect on IPO success, even after accounting for the prestige of a firm’s lead underwriter. The present research has implications for the study of organizational legitimacy, interorganizational endorsements, and entrepreneurship.

Forthcoming in Organization Science