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How much prestige is enough? Assessing the value of multiple types of high-status af 
fi
liates for young
fi
rms
☆
Timothy G. Pollock
a,
⁎
, Guoli Chen
b,1
, Eric M. Jackson
c,2
, Donald C. Hambrick
a,3
a
The Pennsylvania State University, Business Building, University Park, PA 16802, United States
b
INSEAD, 1 Ayer Rajah Ave, 138676, Singapore
c
Managing Member, Iron
 fi
re Capital LLC, United States
a r t i c l e i n f o a b s t r a c t
 Article history:
Received 5 July 2008Received in revised form 14 January 2009Accepted 15 January 2009Available online xxxx
Young, unproven
fi
rms can signal their worthiness, or potential, through af 
fi
liations withvarious types of prestigious parties. Drawing from signaling theory, we present a formalconsideration of the implications of multiple numbers and types of prestigious af 
fi
liates for IPOvaluations. We argue that different types of prestigious af 
fi
liates
–
prestigious executives,directors, venture capital
fi
rms, and underwriters
–
convey different signals of IPO worth,depending on the extent towhich they provide certi
fi
cation or substantive bene
fi
ts. Based on asample of 257 software IPOs, we
fi
nd considerable support for our expectations. The bene
fi
ts of prestigious executives and directors accumulate in a linear, more is better fashion; in contrast,the payoffs from VC and underwriter prestige accumulate in a curvilinear fashion. We discussthe theoretical implications of these
fi
ndings and propose an agenda for future research.© 2009 Elsevier Inc. All rights reserved.
Keywords:
Initial Public OfferingsPrestigeStatusUnderwritersVenture CapitalistsSignalingTop Management TeamsUpper Echelons
1. Executive summary 
We elaborate on the distinction between the certi
fi
cation and substantive bene
fi
ts of prestigious af 
fi
liates, presenting acomprehensive analysis of the implications of multiple numbers and types of prestigious af 
fi
liates for IPO valuations. Althoughscholarshave acknowledged thatprestigiousaf 
fi
liates varyin thenature of the resources theybringtobearon anIPO
fi
rm'sbehalf (e.g.,Jain and Kini, 2000; Sahlman,1990; Wasserman, 2003), they have largelycon
fl
ated the certi
fi
cation and substantive bene
fi
tsof different types of af 
fi
liates. Further, while some scholars have considered the simultaneous effects of more than one type of prestigious af 
fi
liate on IPO outcomes, they have examined the in
fl
uence of multiple parties in a purely
ceteris paribus
fashion (e.g.,Gulati and Higgins, 2003; Sanders and Boivie, 2004; Stuart et al.,1999). Little attention has been paid to the relationships
among 
the different signals, and how the certi
fi
cation and substantive value of each type of signal in
fl
uences investors' interpretations asthey assign value to the newly public
fi
rm.Our studyadvances understandingof this sociallyand economically important phenomenon by drawing a theoretical distinctionbetween the certi
fi
cation and substantive bene
fi
ts prestigious af 
fi
liates can bring to an IPO. In particular, we explore the extent to
 Journal of Business Venturing xxx (2009) xxx
–
xxx
☆
WewouldliketothankTedBaker,GerrySandersandTobyStuartfortheirhelpfulcommentsonearlierversionsof thismanuscript.WewouldalsoliketothankAssociate Editor Dean Shepherd and two anonymous JBV reviewers for their helpful comments and suggestions.
⁎
Corresponding author. Tel.: +1 814 863 0740.
E-mail addresses:
tpollock@psu.edu(T.G. Pollock),Guoli.chen@insead.edu(G. Chen),jackson@iron
fi
recapital.com(E.M. Jackson),dch14@psu.edu(D.C. Hambrick).
1
Tel.: +65 6799 5354.
2
Tel.: (239) 273 4888.
3
Tel.: +1 814 863 0917.
 JBV-05500; No of Pages 18
0883-9026/$
–
see front matter © 2009 Elsevier Inc. All rights reserved.doi:10.1016/j.jbusvent.2009.01.003
Contents lists available atScienceDirect
 Journal of Business Venturing
ARTICLE IN PRESS
Please cite this article as: Pollock, T.G., et al., How much prestige is enough? Assessing the value of multiple types of high-status af 
fi
liates for young
fi
rms, Journal of Business Venturing (2009), doi:10.1016/j.jbusvent.2009.01.003
 
whichmultipleprestigiousaf 
fi
liatesofagiventypeareseenbyinvestorsasadditivelyvaluable,asopposedtomerelycorroborativeorevenredundant.WhilepriorresearchhasconsideredtheeffectsofoneprestigiousunderwriteroroneVConIPOvaluations,ourstudyisthe
fi
rsttoexaminethein
fl
uenceof the
number 
ofprestigiousunderwriters,VCs,executivesanddirectors.Second,weconsidertheextent to which the presence of 
multiple types
of prestigious af 
fi
liates are additive versus redundant in the signals they provide.Our sample included 257 U.S. IPOs between 1994 and 1996 in three sectors of the computer software industry. Consistent withourhypotheses,ourresultssuggestthateveryadditionalprestigiousexecutiveanddirectortendstobringadditivevalue;thisvaluedoesnotdiminishasthenumberofprestigiousactorsaccumulates,anditisonlyminimallyreducedbythepresenceofothertypesof prestigious af 
fi
liates. Thus, prestigious executives and directors clearly exhibit linear effects on IPO valuations, in a
“
more isbetter
”
pattern. Our results also support our hypotheses that multiple prestigious VCs and underwriters are somewhat redundantin the signals theyprovide. Althoughthe additionof each prestigious VC and underwriter brings some additionalvalue in the eyesof investors, the marginalbene
fi
t diminisheswith eachadditional prestigious af 
fi
liate. Further, our resultssuggest that prestigiousunderwriters only partially mediate the effects of other forms of prestige.In sum, our results suggest two potentially important theoretical implications. First, our analysis reveals that the bene
fi
ts of having multiple prestigious af 
fi
liates vary depending on the type of af 
fi
liate. Second, our study suggests that prestigious af 
fi
liatesdiffer in theextent towhichthey provideinformationaboutthe pastas opposedtothe future.Forexample,our
fi
ndingsregardingthelineareffectsofprestigiousexecutivesanddirectorsareconsistentwithexpectationsthattheseactorswillbemoreinvolvedintheongoingoperationsofthecompanyandwillbewiththecompanyforatimefollowingtheIPO.Thus,theinformationprovidedbytheir presence is prospective. In contrast, the effects of prestigious venture capitalists
–
who may have provided the
fi
rm with avarietyofresourcesduringitsdevelopment,butwhoareexpectedtolargelysevertheirtieswiththecompanyshortlyafteritsIPO
–
accumulate in a plateauing, curvilinear fashion. Thus, the information that prestigious VCs signal is more retrospective in nature.Prestigious underwriters, who play an important role at the time of the IPO and in creating the conditions for immediate successthereafter,haveastrongereffectthanVCsonIPOvaluations,buttherelationshipisstillcurvilinear.Theinformationtheyprovideissomewhat prospective, but short-term in nature.
2. Introduction
Scholars have long been interested in the effects of interorganizational relationships on a focal organization's behaviors andperformance (e.g.,Baum et al., 2000; Pfeffer and Salancik, 1978). External linkages can occur through board seats, prioremployment af 
fi
liations, of 
fi
cerships in trade associations, alliances, and other means. They affect a
fi
rm's access to information(Geletkanycz and Hambrick,1997), ideas (Davis and Greve,1997), social capital (Fischer and Pollock, 2004; Miner et al.,1990) and other resources (D'Aveni, 1990).Recently, scholars have become particularly interested in the effects of prestigious af 
fi
liates, or relationships with entities thatareprominentandsociallycentral,onthemarketvaluationsofinitialpublicofferings(IPOs)(e.g.,GulatiandHiggins,2003;Pollocket al., 2004; Stuartet al.,1999). Researchers have been drawn to IPOs as an arenawhere prestigious af 
fi
liates might matter greatly,because these companies typically have limited track records and resources and otherwise carry considerable uncertainty. Underthis line of thought, investors will value a newly-public
fi
rm more highly if it has prestigious af 
fi
liates that convey assurances of quality. By examining the initial valuations of IPOs
–
or the value of the company's shares at the end of the
fi
rst day of trading
–
scholars are able to gauge investors' expectations about the
fi
rm's prospects. Thus, the broad question that prior researchers haveposed about prestigious af 
fi
liates in the IPO context is this: How does the presence of prestigious af 
fi
liates affect investors'assessments of the prospects of the
fi
rm (Carter and Manaster, 1990; Gulati and Higgins, 2003; Stuart et al., 1999)?However, theliteratureonthevalueof prestigiousaf 
fi
liateshasstoppedshortofprovidingtwoimportantclari
fi
cations,bothof which are essential for theory to advance and practical insights to be generated. First, there has been little effort to theoreticallydistinguish between the different types of bene
fi
ts prestigious af 
fi
liates can provide. Generally, researchers emphasize thatprestigious af 
fi
liates serve an
“
endorsement
”
function, certifying the quality of the IPO
fi
rm (e.g.,Carter and Manaster,1990; Leeand Wahal, 2004; Sanders and Boivie, 2004; Stuart et al., 1999). Some scholars also have argued that prestigious parties mayprovide substantive resources, such as abundant social and human capital, that can help to improve the actual functioning of theIPO
fi
rm (e.g.,Bygrave and Timmons, 1992; Fischer and Pollock, 2004; Jain and Kini, 2000). We might reasonably expect thatdifferenttypesofprestigiousaf 
fi
liatesconferdifferentmixesof thesetwobene
fi
ts.Forinstance,prestigiousexecutivesmightbringsubstantive bene
fi
ts based on their experience, capabilities and connections which can be of on-going bene
fi
t to a company; bycomparison, prestigious underwriters may primarily serve a certi
fi
cation function, aiding a
fi
rm in capitalizing on the resources ithas accumulated. Bothtypes of af 
fi
liates would enhance the value of the IPO in the eyes of investors, but for different reasons; andthese differences could greatly affect the optimal mix and amounts of prestigious af 
fi
liates for impressing investors.The lack of theoretical distinction between the certi
fi
cation and substantive bene
fi
ts of prestigious af 
fi
liates makes the secondvoid in the literature all the more notable. Speci
fi
cally, there has been relatively little attention paid to the implications of having
multiple
prestigious af 
fi
liates
–
either of a given type or of different types. IPO
fi
rms can potentially attract various types andquantities of prestigious af 
fi
liates, including executives with blue-chip credentials, outside directors with lustrous backgrounds,prominent venture capital
fi
rms (VCs), and top-tier underwriters. What is not clear from prior research is the extent to whichmultiple prestigious af 
fi
liates operate in an additive and/or substitutive manner in affecting investors' valuations.Incorporating the distinction between certi
fi
cation and substantive bene
fi
ts helps us understand
–
and predict
–
the effects of multiple numbers and types of prestigious af 
fi
liates on IPO valuations. If a given type of prestigious af 
fi
liate provides primarilysubstantivebene
fi
ts, everyadditional af 
fi
liate of thistype shouldaddtothe value of the
fi
rm ona generallylinearbasis; moreover,
2
T.G. Pollock et al. / Journal of Business Venturing xxx (2009) xxx
–
 xxx
ARTICLE IN PRESS
Please cite this article as: Pollock, T.G., et al., How much prestige is enough? Assessing the value of multiple types of high-status af 
fi
liates for young
fi
rms, Journal of Business Venturing (2009), doi:10.1016/j.jbusvent.2009.01.003
 
theeffectof theirprestigeonthecompany'svaluationwillnotbedampenedbythepresenceofothertypesofprestigiousaf 
fi
liates.Incontrast,if agiven typeof af 
fi
liateprimarilyprovidesacerti
fi
cationfunction,thenthe signalsprovidedbyadditionalaf 
fi
liatesof this type would be somewhat redundant in investors' eyes; moreover, the value of a given certi
fi
er would be largely mitigated if another type of prestigious certi
fi
er were also present.These distinctions help to enhance our understanding of the operative mechanisms that convert prestigious af 
fi
liations intoeconomic value. In addition, theyare of practical signi
fi
cance, as they canprovide entrepreneurs guidance on how to get the mostoutoftheir
“
prestigedollars.
”
Consider,forexample,thesoftwareIPOthathasseveralexecutiveswithblue-chipbackgrounds.Howmuchmorevaluablewouldinvestorsdeemthe
fi
rmif theyalsosawseveraloutsidedirectorswithlustrouscredentialslistedintheprospectus?thebackingofatop-tierVC?thebackingofanadditionaltop-tierVC?thesponsorshipofaprestigiousunderwriter,ortwosuchunderwriters?Totheextentthatprestigiousaf 
fi
liatesexactatollfortheirparticipation(Chenetal.,2008;Hsu,2004),thequestions for the IPO
fi
rm are clear: What kinds of, and how much, prestige are enough?In this study we elaborate on the distinction between the certi
fi
cation and substantive bene
fi
ts of prestigious af 
fi
liates, and wepresent a comprehensive consideration of the implications of multiple numbers and types of prestigious af 
fi
liates for IPO valuations.We argue that the presence of multiple types of prestigious af 
fi
liates will have different effects on IPO valuations depending on theextenttowhichtheaf 
fi
liatesprovidesubstantiveresourcesthatcanenhancethefutureperformanceofthe
fi
rmorprimarilycertifythequality of the
fi
rm. Although our data do not allow direct measurement of substantive versus certi
fi
cation bene
fi
ts, throughargumentation we construct very different portrayals of the ways in which these two types of bene
fi
ts will be manifested in IPOvaluations. Our results, based upon a sample of 257 software IPOs, provide considerable support for our theoretical portrayals.Weshouldalsoemphasizethat,byfocusingonend-of-
fi
rst-dayIPOvaluations,weassessthevalueofprestigiousaf 
fi
liates(inthemarket'seyes),netofthecostsofsecuringtheseaf 
fi
liates.Wecanreasonablyassumethatprestigiousparties,awareoftheirrelativerarityand value, will chargemore for theirassociationwith a
fi
rm thanwould less prestigious parties. Indeed, research has shownthat prestigious VCs extract more equity per dollar of investment than do less prestigious VCs (Hsu, 2004), and that prestigiousexecutives hired by
fi
rms prior to their IPOs are paid appreciably more than less prestigious executives (Chen et al., 2008).
4
At theextreme,aprestigiouspartycouldwithholditsservicesunlesspaiditsfullmarginalvalue,whichwouldhavetheeffectofwipingoutthat party's net bene
fi
t for the IPO. Our results indicate that considerable market value is attached to every type of prestigiousaf 
fi
liateweexamine,suggestingthatprestigiousaf 
fi
liates(inoursampleatleast)donotchargeanamountevenclosetotheirvalue.
3. Theory and hypotheses
 3.1. The signaling value of prestigious af 
 fi
liates in the IPO context 
Signaling theorysuggeststhatunderuncertainconditions, andwhereinformationasymmetriesexist betweentwoparties,onepartycansendtheother signalsthatprovideindicationsof itsqualitythroughcharacteristicsthatarecostlyanddif 
fi
cultto imitate(Milgrom and Roberts,1986; Spence,1974). Signaling theory has been used in a wide variety of contexts, including labor markets(Spence,1974; Turban and Cable, 2003), new product introductions (Akerlof,1970), advertising (Nelson,1974), and insider trading of stocks (Sanders and Boivie, 2004).Because IPOs typically carry a great deal of uncertainty, they provide especially fertile ground for research on signaling viaprestigiousaf 
fi
liations. Inparticular, priorresearch has shown theimportanceof examiningthe prestige of anIPO'sexecutives anddirectors (e.g.,Certo, 2003; Higgins and Gulati, 2003), VC backers (Gulati and Higgins, 2003; Lee and Wahal, 2004), and underwriters (Carter and Manaster, 1990; Pollock et al., 2004). These are the four types of prestigious af 
fi
liates we will consider.Although scholars have noted that prestigious af 
fi
liates vary in the resources they bring to bear on the IPO
fi
rm's behalf (e.g., Jain and Kini, 2000; Sahlman, 1990; Wasserman, 2003), they have largely con
fl
ated, or blurred, the potential certi
fi
cation andsubstantive bene
fi
ts of different types of af 
fi
liates. Further, while some scholars have considered the simultaneous effects of morethan one type of prestigious af 
fi
liate on IPO outcomes, they have examined the in
fl
uence of multiple parties in a purely
ceteris paribus
fashion (e.g.,Gulati and Higgins, 2003; Sanders and Boivie, 2004; Stuart et al.,1999). Little attention has been paid to therelationships
among 
the different signals, and how the certi
fi
cation and substantive value of each type of signal in
fl
uencesinvestors' interpretations as they assign value to the newly public
fi
rm.
 3.1.1. The value of certi
 fi
cation
Priorresearchhascon
fi
rmedthatthecerti
fi
cationprocessisawaytoreduceuncertaintyaboutthequalityofanentitywhendirectindicators of quality are absent or dif 
fi
cult to discern (Baum and Oliver, 1992; Fombrun, 1996; Rao, 1994; Wade et al., 2006).Certi
fi
cation occurs when an actor obtains the endorsement of reputable, high-status third parties who risk their own reputationalcapital by associating with the entities (Baum and Oliver, 1992; Wade et al., 2006). Following from the idea that certi
fi
cation byprestigiousunderwritersservestomitigatesomeoftheuncertaintyassociatedwithIPOs(CarterandManaster,1990),researchershaveargued that af 
fi
liations with prestigious actors provide a signal of an IPO's underlying quality (Carter et al.,1998; Gulati and Higgins,
4
Whereas prestigious VCs and executives may be expected to capitalize directly on their prestige by extracting higher rents, the same is not true forunderwriters and directors. Prior research has demonstrated that there are strong norms in the IPO market that underwriters receive the same overallcommission (seven percent of the value of the offering) regardless of their prestige (e.g.,Chen and Ritter, 2000). Thus, to capitalize on their prestige underwritersmust generate a higher stock price for the IPO. Similarly, all directors are typically paid the same compensation and receive the same option or stock grants forserving on the board (Beatty and Zajac, 1994; Chen et al., 2008), and therefore will recoup the value of their prestige in different ways.3
T.G. Pollock et al. / Journal of Business Venturing xxx (2009) xxx
–
 xxx
ARTICLE IN PRESS
Please cite this article as: Pollock, T.G., et al., How much prestige is enough? Assessing the value of multiple types of high-status af 
fi
liates for young
fi
rms, Journal of Business Venturing (2009), doi:10.1016/j.jbusvent.2009.01.003
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