Zimmerman - 2008 - ENTREP THEORY PRACT - The Influence of Top Management Team Het

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The Influence of Top

E T&P Management Team
Heterogeneity on the
Capital Raised
through an Initial
Public Offering
Monica A. Zimmerman
A significant body of research exists on the top management teams (TMTs) of established
firms and specifically on the heterogeneity of TMTs of established firms. Little research
exists, however, on the heterogeneity of TMTs of firms in the early stages of their existence.
In this study, I examine the relationship among TMT heterogeneity and the capital raised by
the firm through its initial public offering (IPO). I argue that TMT heterogeneity provides a
signal to potential investors about the quality of the IPO and hence is associated with greater
capital accumulations. My findings suggest that heterogeneity in the TMT’s functional
background and educational background is associated with greater capital raised through
an IPO.
T he initial public offering (IPO) of a firm’s stock is a significant time in the life of
the firm. It is a point of transition from the private to the public domain (Certo, 2003).
Although firms preparing for an IPO often attract investors’ attention, the attention often
does not result in investment because IPO firms have little or no operating history, lack a
publicly available record for their stock price, and are riskier than larger, more established
firms (Beatty & Zajac, 1994; Nelson, 2003; Welbourne & Andrews, 1996). They face a
liability of market newness (Certo, 2003).
IPOs have been the focus of extensive research, and many theoretical perspectives
have been used to study IPOs including agency theory, resource dependence theory, and
signaling theory (Beatty, 1989; Brav & Gompers, 1986; Carter, Dark, & Singh, 1998;
Certo, 2003; Daily, Certo, Dalton, & Roengpitya, 2003; Deeds, DeCarolis, & Coombs,
1997; Lester, Certo, Dalton, Dalton, & Cannella, 2006; Megginson & Weiss, 1991;
Pollock, Porac, & Wade, 2004; Sanders & Boivie, 2004). Signaling theory has been used
quite extensively in part because it captures the information asymmetry and uncertainty
surrounding the IPO (Certo, 2003). IPO firms signal potential investors to demonstrate
that they are economically rational investments and that they will perform well in the
Please send correspondence to: Monica Zimmerman Treichel, tel.: (215) 204-1692; fax: (215) 204-8029;
e-mail: monica.treichel@temple.edu
May, 2008 391

future (Certo, 2003; Deeds et al., 1997; Zimmerman & Zeitz, 2002). Firms that demon-
strate that they are economically rational investments can gain legitimacy, and legitimacy
provides firms access to the resources they need to survive and grow (Zimmerman &
Zeitz, 2002). Specific firm characteristics used as signals include underwriter’s reputation,
equity retained in the firm, auditor reputation, firm size, venture capital (VC) equity
invested in the IPO firm, and top management team (TMT) prestige (Carter & Manaster,
1990; Certo, 2003; Daily et al., 2003; Downes & Heinkel, 1982; Lester et al., 2006;
McBain & Krause, 1989).
Certo (2003) and Lester et al. (2006) suggest that TMT characteristics signal the
firm’s legitimacy and may enable the firm to access capital. TMT characteristics have been
argued to play an important role in strategic decision making and firm performance (e.g.,
Hambrick & Mason, 1984). A specific aspect of TMT research has examined TMT
heterogeneity and its relationship to firm performance in established firms (Glick, Miller,
& Huber, 1993; Hambrick, Cho, & Chen, 1996; Kilduff, Angelmar, & Mehra, 2000; Lyon
& Ferrier, 2002; Simons, Pelled, & Smith, 1999). TMT heterogeneity is typically mea-
sured in terms of observable characteristics such as functional background, education,
tenure, and age, which serve as proxies for psychological attributes that influence strategic
choices and firm performance (Hambrick & Mason, 1984). Published research offers
support for the claim that the breadth of perspective, experience, knowledge, insight, etc.,
provided by a heterogeneous TMT is positively related to firm performance in established
firms (e.g., Hambrick & Mason, 1984; Kilduff et al., 2000) and the importance of a
balanced team in the early stages of funding (Macmillan, Siegel, & Narasimha, 1985;
Roure & Maidique, 1986). Such research suggests that a heterogeneous TMT would be
beneficial to the ability of the firm to raise capital through an IPO.
Despite the wealth of literature on IPOs and evidence that TMT characteristics
influence firm performance, there is relatively little research examining the influence of
the TMT characteristics on IPO performance (e.g., Carpenter, Pollock, & Leary, 2003;
Deeds, Mang, & Frandsen, 2004; Filatotchev & Bishop, 2002; Finkle, 1998; Lester et al.,
2006; Nelson, 2003; Sanders & Boivie, 2004; Welbourne & Cyr, 1999). Carpenter et al.
(2003) found that governance and stakeholder characteristics influenced global risk taking
of IPO firms. Deeds et al. (2004) examined the influence of firm-level legitimacy, includ-
ing TMT credentials (i.e., graduate business education), upon the capital raised through an
IPO. They found that firm-level legitimacy significantly influenced the amount of capital
raised but that TMT credentials were not significantly related to capital raised. Filatotchev
and Bishop examined underpricing of IPOs in relationship to board composition and
ownership and found that the proportion and extraorganizational ties of nonexecutive
board members were negatively related to underpricing of IPOs. They also found that
the diversity and equity holdings of the board were negatively related to the experience
and stock ownership of the TMT. Nelson found differences in the governance and own-
ership between founder-led and nonfounder-led IPO firms. Specifically, founder-led firms
received higher stock price premiums than nonfounder-led firms. Sanders and Boivie
examined corporate governance characteristics as indirect indicators of potential qualita-
tive differences among IPO firms and found that the market valuation of IPO firms was
significantly related to such characteristics. Furthermore, Welbourne and Cyr found that
stock price was positively related to the presence of a human resource executive on the
TMT in fast-growing and small IPO firms.
I could identify only two studies that examined TMT demographic characteristics as
IPO signals (Finkle, 1998; Lester et al., 2006) and only one that addressed corporate
governance as an IPO signal (Sanders & Boivie, 2004). Finkle examined Chief Executive
Officer (CEO) and board of directors characteristics of biotechnology IPOs and found that
392 ENTREPRENEURSHIP THEORY and PRACTICE

CEO and director expertise were positively related to the amount of capital raised. Lester
et al. examined TMT prestige and found that it was significantly related to investor
valuations of IPO firms. Specifically, they found that educational prestige was positively
related to investor valuations. Sanders and Boivie examined corporate governance as an
IPO signal (stock-based incentives, board structure, institutional and blockholder stock
ownership, and VC involvement) and found that market valuation was significantly related
to these characteristics.
The research question I addressed in this paper is, “Does TMT heterogeneity influence
the amount of capital the firm raises through its IPO?” The focus of the paper is on the
role that TMT characteristics play in raising capital, i.e., a resource critical to the firm’s
survival and growth (Deeds et al., 1997, 2004; Finkle, 1998; Gulati & Higgins, 2003), by
signaling its legitimacy to potential investors (Certo, 2003; Lester et al., 2006). I argue that
heterogeneity provides a signal to potential investors about the future prospects of the IPO
and hence is associated with greater capital accumulations. I examine the relationship
between four types of TMT heterogeneity—functional background, educational back-
ground, age, and tenure—and the amount of capital raised at IPO. To test the theory, I
examine data from 172 software firms that underwent an IPO (between January 1, 1993
through December 31, 1997). Data were collected on the TMT, the firm, and the capital
raised through an IPO. I begin with a review of literature on signaling theory and TMT
heterogeneity, followed by an analysis of data. I conclude with a discussion of results.
Literature Review
The IPO process is a complex one. The firm transitions from a privately owned and
managed firm to one that is publicly owned (Certo, 2003). Firms undertake an IPO
primarily “to infuse a significant amount of investment capital into the firm” (Deeds et al.,
1997, p. 31). The success of an IPO can be determined by the amount of capital that flows
into the firm, and this amount depends upon the favorable evaluation of the firm by the
financial market (Deeds et al., 2004). The amount of capital the firm can raise through an
IPO involves negotiations between the lead underwriter and the firm. The potential for
raising capital is not only based upon financial characteristics such as assets, earnings,
book value, etc. (Welbourne & Andrews, 1996) but also upon intangible assets (Deeds
et al., 1997), such as the TMT (Certo, 2003; Finkle, 1998; Nelson, 2003; Welbourne &
Cyr, 1999). In this paper, I argue that the TMT characteristics are signals sent by the
IPO firm to potential investors about the future prospects of the firm and hence might
be associated with greater capital accumulations.
Signaling Theory
Signaling theory is based on the need to resolve information asymmetry in decision
making (Spence, 1974). Initially used to describe the hiring process, “the basic premise of
signaling theory is that all of the necessary information for an organization to predict an
individual’s future productivity is usually unobtainable” (Hannon & Milkovich, 1996,
p. 405). Therefore, managers need to rely on other items (termed signals) to indicate that
the individual has the potential to be a productive member of the organization.
When applied to organizations, signals attempt to reduce the subjective uncertainty
of outside constituencies regarding the productivity and viability of the organization.
Thus, the organization gives out partial bits of information that are meant to indicate to
outsiders that relevant and important resources and capabilities are present or obtainable
May, 2008 393

(Zimmerman, Zeitz, & Coombs, 2004). Such signals can include evidence of the TMT’s
ability to manage the firm. As Clark, Cornwell, and Pruitt (2002) argued, “signaling theory
revolves around the judicious use of signals that are consistent with the attainment or
possession of a particular and valued attribute that, in the absence of the signal, would be
very difficult to unambiguously convey” (p. 26). Because there is much information
asymmetry and uncertainty surrounding an IPO (Certo, 2003), signaling theory may help
us gain a greater understanding of actions firms take to improve their position vis-à-vis
potential investors.
Specific signals found to influence IPO performance include VC backing (Barry,
Muscarella, Peavy, & Vetsuypens, 1990; Brav & Gompers, 1997; Gulati & Higgins, 2003;
Lin, 1996; Megginson & Weiss, 1991), underwriter reputation (Barry et al., 1990; Beatty
& Ritter, 1986; Carter & Manaster, 1990; Daily et al., 2003), auditor reputation (Beatty,
1989; Daily et al., 2003; Titman & Trueman, 1986), prominent affiliations with organi-
zations (Gulati & Higgins, 2003; Stuart, Hoang, & Hybels, 1999), firm size (Daily et al.,
2003), corporate governance (Certo, 2003; Certo, Daily, & Dalton, 2001; Higgins &
Gulati, 2003; Lester et al., 2006; Nelson, 2003; Sanders & Boivie, 2004), and equity
retained by insiders (Certo, Covin, Daily, & Dalton, 2001; Daily et al., 2003; Downes &
Heinkel, 1982; Filatotchev & Bishop, 2002; Fischer & Pollock, 2004; Gompers & Lerner,
1999; McBain & Krause, 1989).
The majority of the IPO signaling research focuses on underpricing as the dependent
variable (Pollock et al., 2004). Three studies focused on the use of signals in raising
capital (Deeds et al., 1997; Finkle, 1998; Sanders & Boivie, 2004). Because a key reason
firms undertake an IPO is to secure resources to grow and survive (Daily et al., 2003;
Deeds et al., 1997, 2004; Finkle, 1998; Nelson, 2003; Rasheed & Datta, 1997; Welbourne
& Andrews, 1996), understanding the role that signals play in securing those resources,
i.e., capital, is valuable to the study of IPOs.
In this paper, I build on the work of Certo (2003; Certo, Dailey, & Dalton, 2001) and
Lester et al. (2006) and develop theory to suggest that a specific aspect of the firm that
may provide a valuable signal to investors about its future prospects is the TMT’s
characteristics. In an effort to alleviate uncertainty as to the future performance of the firm,
the firm presents its management team’s characteristics as signals that the firm is struc-
tured for high performance, and investors use those signals in making their investment
decisions (Certo, 2003; Certo et al., 2001; Lester et al., 2006). Thus, I expect that TMT
characteristics may influence the capital raised through an IPO.
TMT Characteristics
Cyert and March (1963) first noted the importance of the TMT to the firm in their
work on the dominant coalition. Later, Hambrick and Mason (1984) proposed their upper
echelons perspective, a behavioral approach that treats the TMT as a significant influence
on the direction and performance of the firm. In the upper echelons perspective, the
attitudes, skills, values, and cognitive structures of the TMT are often cited as influencing
the strategic choices of the TMT (Hambrick & Mason, 1984). A myriad of studies have
since examined the characteristics of the TMT and their relationship to strategic decision
making and firm performance (e.g., Bantel & Jackson, 1989; Hambrick, 1994; Hambrick
et al., 1996; Wiersema & Bantel, 1992).
Although the predominance of the literature on TMTs is based on established com-
panies, some literature has demonstrated the importance of the TMT characteristics in
new firms (e.g., Boeker, 1988; Eisenhardt & Schoonhoven, 1990; Kamm, Shuman,
Seeger, & Nurick, 1990; Lester et al., 2006; Macmillan et al., 1985; Mudambi &

Zimmerman Treichel, 2005; Roure & Maidique, 1986; Siegel, Siegel, & MacMillan,
1993) including changes that take place in the TMT as the firm transitions through the life
cycle (Clarysse & Moray, 2004; Hanks & Chandler, 1994; Kamm & Nurick, 1992; Lynall,
Golden, & Hillman, 2003).
As the TMT literature developed, many characteristics of the TMT have been studied.
One characteristic that attracted a great deal of attention is the heterogeneity of the team.
Four measures of TMT heterogeneity have been explored—functional background, edu-
cational background, age, and tenure. These measures have been studied extensively but
rarely have all four been studied together (Bantel, 1993; Murray, 1989; Pegels & Song,
2000). Published research offers support for the claim that a heterogeneous TMT makes
better strategic decisions and is positively related to a variety of desirable outcomes, at
least in established firms, including firm performance (Glick et al., 1993; Hambrick et al.,
1996; Kilduff et al., 2000; Lyon & Ferrier, 2002; Simons et al., 1999). Although measures
of TMT heterogeneity have been argued and found to influence performance in new and
small firms (Amason & Sapienza, 1997; Eisenhardt & Schoonhoven, 1990; Ensley,
Carland, & Carland, 1998; Macmillan et al., 1985; Roure & Maidique, 1986; Ucbasaran,
Lockett, Wright, & Westhead, 2003), the findings are limited, and I found no research
examining all four forms of TMT heterogeneity in new firms. The four heterogeneity
measures “are complementary, reflecting diversity on somewhat different dimensions”
(Hambrick et al., 1996, p. 672). Hence, in this paper I look at these four types of TMT
heterogeneity as a group as well as individually.
Functional Background
The functional background of the top managers has been identified as an important
characteristic of the TMT (Brouthers, Brouthers, & Werner, 2000; Hitt & Tyler, 1991).
Although top managers are thought to have a generalist’s perspective (Hambrick &
Mason, 1984), it is often the case that these individuals have a functional specialization
(Gupta, 1984). Hambrick and Mason argued that top managers have an orientation that
develops from functional experience; this functional orientation may not dominate the
strategic choices made, but it does influence decisions. Functional background was found
to influence the strategic choices of firm founders in that they emphasize the function with
which they have experience (Boeker, 1988). Brouthers et al. found that managers
with functional experience in management pursued more aggressive strategies compared
to managers with functional experience in finance and accounting.
Researchers have proposed that greater team member heterogeneity of functional
backgrounds may increase the variety of environmental scanning alternatives, foster
effective decision making, influence competitive action and response, and lead to inno-
vation and creativity, all of which positively influence strategic decision making and firm
performance (Bantel & Jackson, 1989; Glick et al., 1993; Hambrick & Mason, 1984;
Hambrick et al., 1996; Lant, Milliken, & Batra, 1992; Murray, 1989; Roure & Keeley,
1990; Weinzimmer, 1997; Williams & O’Reilly, 1998). The impact of TMT functional
heterogeneity in new ventures has also been examined. Roure and Maidique (1986) found
that the breadth of functions represented on founding teams was important in accessing
venture capital, i.e., early stage technology-based firms received VC funding when they
had teams that were complete as to the functions of marketing, finance, operations, and
engineering. Ucbasaran et al. (2003) argued that the functional background in the entre-
preneurial founding team indicates the heterogeneity of “human capital necessary for
venture development” (p. 112). Ensley et al. (1998) found heterogeneity in the TMT’s
May, 2008 395

functional background to be negatively related to performance (i.e., revenue) in new
ventures.
As the firm transitions into a publicly traded market for its stock, it faces challenges
and opportunities it did not face as a privately held firm. TMT functional heterogeneity
may signal to outside investors that the firm will be successful in the future for the
following reasons. The benefits of TMT functional background heterogeneity found
in established firms including environmental scanning alternatives, effective decision
making, competitive action and response, strategic clarity, innovation, and creativity
(Bantel, 1993; Bantel & Jackson, 1989; Glick et al., 1993; Hambrick & Mason, 1984;
Hambrick et al., 1996; Lant et al., 1992; Murray, 1989; Roure & Keeley, 1990;
Weinzimmer, 1997; Williams & O’Reilly, 1998) should also benefit newly public firms as
they address the challenges and opportunities faced by publicly held firms. Heterogeneity
may also provide the team with a broader perspective and diversity of information (e.g.,
Bantel, 1993; Glick et al., 1993; Hambrick, 1994; Hambrick & Mason, 1984; Williams &
O’Reilly, 1998) in addressing these challenges and opportunities. In addition, a team
experienced across functional areas (e.g., finance, human resources, marketing, opera-
tions, engineering) enables the firm to respond to challenges and opportunities more
effectively than a team focused in one functional area (e.g., engineering). Furthermore,
investors in IPO firms typically expect the firms to exhibit high growth, and as Eisenhardt
and Schoonhoven (1990) demonstrated, a more functionally heterogeneous TMT can
better address strategic opportunities and enable the firm to grow. Thus, it appears that
heterogeneity in the top managers’ functional background might provide a signal to
potential investors about the quality of an IPO firm, and so a firm with greater heteroge-
neity in the functional background of the TMT will raise more capital through an IPO
than firms with less heterogeneity.
Hypothesis 1: Heterogeneity in the TMT’s functional background is positively
related to the amount of capital raised at IPO.
Education
Education has been argued to indicate an individual’s knowledge and skills (Ham-
brick & Mason, 1984) and to be related to the team’s information-processing capacity
(Bantel, 1993). Educational level reflects an individual’s cognitive ability and skills
(Wiersema & Bantel, 1992). Higher levels of TMT education were found to be related
to greater levels of innovation (Bantel & Jackson, 1989; Kimberly & Evanisko, 1981;
Wiersema & Bantel, 1992), to influence individuals’ information processing and recep-
tiveness to innovation boundary spanning (Bantel & Jackson, 1989), and to be positively
related to strategic change (Wiersema & Bantel, 1992). Hambrick and Mason proposed
that the type of education earned by the top managers influences their strategic decisions.
Boeker (1988) extended this argument in the context of new firms by arguing that more
highly educated entrepreneurs are more likely to emphasize technical innovation.
Heterogeneity in the educational backgrounds of the TMT has also been identified as
an important characteristic. According to Bantel (1993), heterogeneity in the educational
background of the TMT suggests variety in their perspective. It was found to be positively
related to competitive action and competitive response (Hambrick et al., 1996), to strate-
gic change (Wiersema & Bantel, 1992), to strategic clarity (Bantel, 1993), and to firm
performance in established firms (Hambrick et al., 1996; Smith et al., 1994). Wiersema
and Bantel interpreted their findings that TMT educational background heterogeneity
is positively related to strategic change as support for the argument that “diversity in

cognitive perspectives facilitates adaptation” (p. 114). Smith et al. argued that the positive
relationship found between educational background heterogeneity and performance may
be due to the creativity fostered by the heterogeneity. In addition, in addressing complex
situations, such as an IPO, breadth in educational backgrounds may positively influence
performance. Tihanyi, Ellstrand, Daily, and Dalton (2000) argued that in complex issues,
a TMT “representing a broad and diverse educational base may be better equipped to deal
with the wide range of relevant issues that must be considered” (p. 1165). Ensley et al.
(1998) found that in new ventures, the TMT’s educational background heterogeneity was
negatively related to performance, concluding that this may be due to conflicts resulting
from differences in the team, and the conflicts result in problems in implementing key
decisions.
TMT educational background heterogeneity may also provide a signal to potential
investors about future performance. TMTs with greater educational heterogeneity may be
perceived as having greater performance potential because greater heterogeneity leads to
greater diversity of information sources; an increase in variety of perspective, values,
experience, and beliefs; cognitive benefits such as innovation, range of perspectives, and
number and quality of ideas; as well as increased creative and innovative decision making
(Bantel, 1993; Milliken & Martins, 1996; Tihanyi et al., 2000; Wiersema & Bantel, 1992).
Educational heterogeneity may be perceived as better equipping the firm to deal with the
breadth of issues to be considered (Tihanyi et al., 2000). A diverse set of educational
backgrounds in the TMT signals that the TMT has breadth in its perspective and inter-
pretations, as well as diversity in its cognitive base, which positively influence strategic
decision making (Hambrick & Mason, 1984; Wiersema & Bantel, 1992). Thus, it appears
that heterogeneity in the educational background of the TMT might provide a signal to
potential investors about the quality of an IPO firm, and so a firm with greater heteroge-
neity in the educational background of the TMT will raise more capital through an IPO
than firms with less heterogeneity.
Hypothesis 2: Heterogeneity in the TMT’s educational background is positively
related to the amount of capital raised at IPO.
Age
The age of the TMT members is another TMT characteristic that has been linked to
the strategy and performance of the firm. According to Richard and Shelor (2002), age is
a proxy for perspectives, belief systems, networks, and affiliations. Wiersema and Bantel
(1992) argued that as people age their flexibility decreases and rigidity and resistance to
change increases. Youthful mangers are commonly associated with attempting the risky,
novel, and unprecedented (Boeker, 1988; Hambrick & Mason, 1984; Wiersema & Bantel,
1992), linked to firm growth (Child, 1974), and more receptive to change, and willing to
take more risks than older managers (Wiersema & Bantel, 1992). Firms managed by
younger top managers were less likely to experience firm crisis than firms managed
by older top managers (Mudambi & Zimmerman Treichel, 2005). Boeker argued that
younger entrepreneurs are better able to understand recent innovations.
Heterogeneity in the age of the TMT increases the variety of perspectives used in
addressing strategic issues and expands the breadth of information, perspectives, and
creativity, which positively relate to performance (Richard & Shelor, 2002; Wiersema &
Bantel, 1992). Greater age heterogeneity in the TMT has been linked to improved firm
performance (Kilduff et al., 2000; Richard & Shelor, 2002; Wiersema & Bantel, 1992).
Williams and O’Reilly (1998) argued that age heterogeneity may provide greater access
May, 2008 397

to a broader set of information and perspectives and so may enhance group decision
making. But it may also make communication and social integration more difficult and
conflict more likely. Some forms of conflict may be related to growth. For example,
Ensley, Pearson, and Amason (2002) found that cognitive conflict1 was related to cohe-
sion among top mangers and that cohesion was positively related to growth in new
ventures. Although Bantel (1993) argued that age cohort similarity promotes commu-
nication and consensus building and so a more homogeneous TMT with respect to
age should be positively related to strategic clarity, she found little support for her
argument.
TMT age heterogeneity may also provide a positive signal to potential investors for
several reasons. First, age heterogeneity is associated with greater firm performance
(Kilduff et al., 2000; Richard & Shelor, 2002; Wiersema & Bantel, 1992). Second, the
variety of perspectives and creativity that TMT age heterogeneity provides indicates that
the firm is better able to address strategic issues and so perform better than less hetero-
geneous firms (Richard & Shelor, 2002; Wiersema & Bantel, 1992). Third, when age is
viewed as a proxy for perspectives, belief systems, networks, and affiliations (Richard &
Shelor, 2002), heterogeneity in the top managers’ age should provide a broader set of
perspectives, belief systems, networks, and affiliations for the TMT to use in addressing
the challenges faced by newly public firms. Thus, it appears that age heterogeneity might
provide a signal to potential investors about the quality of the IPO firm and hence be
associated with greater capital accumulation.
Hypothesis 3: Heterogeneity in the age of the TMT is positively related to the
amount of capital raised at IPO.
Tenure Heterogeneity
Tenure can be viewed as a proxy for its commitment to the status quo, informational
diversity, and risk propensity, and the TMT’s tenure may affect organizational outcomes
(Finkelstein & Hambrick, 1990). Long-tenured groups have been associated with
increased cognitive rigidity and commitment to the status quo (Bantel & Jackson, 1989),
standard ways of communicating (Katz, 1982), persistent strategies, and strategies that
conform to those of the industry (Finkelstein & Hambrick, 1990).
Bantel (1993) argued that members with similar tenure form a cohort that influences
consensus, and that homogeneity in tenure will be positively related to the TMT’s ability
to reach consensus on strategic decisions. However, Bantel found little support for her
argument. Heterogeneity in the tenure of the TMT was found to be positively related
to firm performance, strategic change, and the degree of international diversification
(Hambrick et al., 1996; Murray, 1989; Tihanyi et al., 2000; Wiersema & Bantel, 1992).
Hambrick et al. found tenure heterogeneity among the TMT to positively affect a
firm’s competitive action propensity and the scope of its competitive response. Williams
and O’Reilly (1998) argued that groups with greater tenure heterogeneity have less
social integration, higher turnover, and poorer communication than groups with
less heterogeneity.
Potential investors may perceive TMT tenure heterogeneity as a signal that indicates
whether the firm will stick to past strategies or be flexible in its strategic approaches.
1. “Cognitive conflict occurs when top management team members consider a number of strategic alterna-
tives from a variety of diverse perspectives” (Ensley et al., 2002, p. 369).

Greater tenure heterogeneity may lead to greater strategic flexibility and hence an
ability to address the challenges experienced in transitioning from private to public
ownership (Bantel & Jackson, 1989; Certo, 2003; Wiersema & Bantel, 1992). Alterna-
tively, tenure homogeneity may lead to strategic rigidity, and hence a firm with a homo-
geneous (i.e., tenure) TMT may experience problems once the IPO is complete.
In addition, heterogeneity in the tenure of the TMT may be due in part to the presence
of founders on the team and recent additions to the team. Founders are central to the
creation of the firm (Schein, 1983), and in technology-based firms, they may be central to
the invention of the technology used by the firm (Chandler & Hanks, 1998). Ucbasaran
et al. (2003) found that entrepreneurial founder teams do not remain static over time and
argued that the entry to and exit from entrepreneurial teams is related to the functional
heterogeneity of founding teams. A team considered as balanced at start-up may not be
considered balanced as the venture develops. Managers with short tenures may be addi-
tions to the team made shortly before the IPO to round out the team, especially with regard
to the functions represented on the team (Ryan & Hise, 2001). These additions bring with
them experience in other firms as well as a fresh view of the firm they join. However,
teams that are more homogeneous, either containing only founders or new managers, may
lack specific firm experiences and/or broader perspectives and contacts (e.g., Glick et al.,
1993; Hambrick, 1994; Hambrick & Mason, 1984). Thus, it appears that tenure hetero-
geneity might provide a signal to potential investors about the quality of the IPO firm, and
hence be associated with greater capital accumulations.
Hypothesis 4: Heterogeneity in the TMT’s tenure is positively related to the amount
of capital raised at IPO.
Methods
Sample and Data Collection

The sample used in this study are firms undergoing their IPO of stock during the time
period of January 1, 1993 through December 31, 1997. In an effort to examine a large
sample of young firms in a single industry, the prepackaged software industry was
examined, i.e., Standard Industrial Classification (SIC) code 7372. Examining a single
industry prevents industry effects from confounding relationships between the indepen-
dent and dependent variables (Dess, Ireland, & Hitt, 1990). The prepackaged software
industry was selected because of the large number of software firms that went public
during a recent period of significant IPO activity and during a period that preceded the
dot-com bubble euphoria: a period of market exuberance in which investment metrics
were turned upside down (Mudambi & Zimmerman Treichel, 2005). A total of 243
U.S.-based software firms were identified by IPO Reporter and IPO Data as having an
IPO during the period of January 1, 1993 through December 31, 1997.
The primary source of data used in this study was the firm’s IPO prospectus. The IPO
prospectus discloses information valuable to regulators, investors, underwriters, and other
relevant parties (Beatty & Zajac, 1994). A number of studies have used IPO filings as a
source of primary data (e.g., Beatty & Zajac, 1994; Daily et al., 2003; Deeds et al., 1997,
2004; Lester et al., 2006; Welbourne & Andrews, 1996). I was able to obtain IPO
prospectuses for 172 of the firms either directly from the firm (I contacted them by letter
and/or by phone to request a copy of their IPO prospectus) or by purchasing the pro-
spectus from IPO Data. I was unable to secure prospectuses from the remaining 71
firms (29%). The sample used in this study (172 firms) was representative of the larger
May, 2008 399

population: The average IPO value of the population was $30,616,536, and the average
IPO value of firms in the sample was $32,659,133.
Dependent Measure
IPO Value. The dependent variable used in this study is the capital raised at IPO,
measured as the total value of the capital for the firm raised through the firm’s IPO less the
underwriters’ fees as noted on the cover page of the firm’s prospectus (Deeds et al., 1997,
2004; Finkle, 1998; Gulati & Higgins, 2003). It is a measure not only of IPO performance
(Gulati & Higgins, 2003) but also of how the market values a company at the time of its
initial offering (Deeds et al., 2004; Finkle, 1998).
Independent Measures
The TMT was defined as those managers listed in the prospectus as composing the
firm’s management team (Lester et al., 2006; Shrader, Oviatt, & McDougall, 2000). This
definition includes all of the C-level positions, e.g., CEO, chief financial officer, chief
operating officer, as well as vice presidents, senior vice presidents, and other managers
listed in the management section of the prospectus. Including these members enables us
to include the most important organizational decision makers (Murray, 1989; Tihanyi
et al., 2000). Data on the top managers were obtained from the managers’ biographies
presented in the IPO prospectus. TMT heterogeneity data were coded using the following
guidelines:
Functional Heterogeneity. Functional background heterogeneity was calculated using

Blau’s (1977) heterogeneity index (1-Si2), where i is the proportion of the group in the ith
category. A high score indicates variability in the functional backgrounds among team
members, i.e., functional heterogeneity, and a low score represents homogeneity (Smith
et al., 1994). The functional categories used to calculate the index were those functional
categories frequently used in the study of heterogeneity—finance, human resources,
general management, marketing/public relations, operations, engineering/R&D, strategic
planning, and law (Boeker, 1988; Murray, 1989; Tihanyi et al., 2000), to which I added
executive, information technology, and other.
Educational Heterogeneity. Educational background heterogeneity was measured using

Blau’s (1977) heterogeneity index as described earlier. I used the eight educational
background categories used by Hambrick et al. (1996), i.e., engineering, science, business
administration, economics, liberal arts, law, business other, and other. As was done by
Wiersema and Bantel (1992), individuals with BS or MS degrees were classified as
science specialists unless a discipline was listed.
Age Heterogeneity. Age heterogeneity was calculated as the coefficient of variation of

the top managers’ age (Murray, 1989; Richard & Shelor, 2002; Tihanyi et al., 2000),
where a high score indicates age heterogeneity and a low score indicates age homogeneity.
Tenure Heterogeneity. Tenure heterogeneity was calculated as the coefficient of varia-

tion of the top managers’ tenure (Murray, 1989; Tihanyi et al., 2000), where a high score
indicates age heterogeneity and a low score indicates age homogeneity.

Control Variables
Year of IPO. Year of IPO was measured as the year in which the IPO took place
beginning with 1993 as the base year—“1” for 1993, “2” for 1994, “3” for 1995, “4” for
1996, and “5” for 1997. It is used to control for the development of the software industry
and the industry legitimacy that develops over time. According to Zimmerman and Zeitz
(2002), the level of industry legitimacy is related to the ability of the firm to secure
resources, i.e., capital.
Hot Market. The effect of periods of increased market activity has been shown to
positively influence the IPO of stock. Hot Market was used to identify firms that went
public during years of high IPO activity (Deeds et al., 1997, 2004; Ritter, 1984). The years
1993 and 1996 were two hot markets for IPOs (http://www.marketdata.nasdaq.com/asp/
Sec3IPO.asp). If the firms in the sample went public during either 1993 or 1996, they were
coded as “1” and “0” otherwise (Deeds et al., 1997, 2004). This is similar to the period
effect measured by Carpenter (2002).
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 mea-
sured as the total number of years that elapsed between the incorporation of the busi-
ness 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 estab-
lish 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 het-
erogeneity 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.
May, 2008 401

Underwriter Reputation. The reputation of the underwriter has been shown to be espe-
cially beneficial to IPO performance (Beatty & Ritter, 1986; Gulati & Higgins, 2003;
Lange, Bygrave, Nishimoto, Roedel, & Stock, 2001). Underwriter reputation was mea-
sured 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 tomb-
stone 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 experi-

ence 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 = -S 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
et al.’s (2003) measure of entrepreneurial experience heterogeneity, I calculated
Teachman’s (1980) heterogeneity scale to measure heterogeneity of founder experience,
where H = -S 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.

May, 2008
Table 1
Descriptive Statistics
Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
IPO value (1) 24.52 27.29 1.00

Year of IPO (2) 3.12 1.04 .17* 1.00
Hot market (3) .31 .46 .03 .07 1.00
Firm age (4) 7.34 4.63 .15* .00 -.07 1.00
TMT size (5) 6.53 2.29 .32* .11 .03 .20** 1.00
Equity raised (6) .25 .13 -.15* -.18* .01 -.07 -.33** 1.00
Prior sales (7) 25.03 70.42 .47** .05 -.06 .17* .11 -.13 1.00
Team tenure (8) .96 1.28 -.06 .08 .09 .21** -.27** -.17* .02 1.00
Underwriter reputation (9) 6.40 3.54 .32** -.01 -.01 .11 .42* .55** .17* -.24** 1.00
VC backing (10) .12 .32 .14 -.03 .03 -.06 .04* -.17 -.02 -.09 .15 1.00
Founder experience (11) .40 .26 -.04 -.04 -.06 -.07 -.11 -.09 -.14 .19* .00 .03 1.00
Entrepreneurial experience (12) .23 .27 -.08 .09 .05 -.22** -.15 .03 .01 .07 -.14 -.06 .23** 1.00
Functional heterogeneity (13) .69 .14 .25** -.07 -.02 .08 .42** -.16* .08 -.31** .27** .04 -.19* -.17* 1.00
Educational heterogeneity (14) .31 .32 .11 .12 -.08 .12 .05 -.05 -.01 .03 -.05 .03 .16* .02 -.02 1.00
Age heterogeneity (15) .15 .05 -.06 -.05 -.03 -.01 -.05 .04 -.05 .00 -.17* -.17* .01 .12 .01 .06 1.00
Tenure heterogeneity (16) .74 .34 .08 -.01 -.07 .16* .22** -.09 .03 -.48** .28** .02 -.15 -.10 .31 -.10 -.03 1.00
N = 172; * p < .05; ** p < .01

SD, standard deviation; IPO, initial public offering; VC, venture capital; TMT, top management team.
403
Table 2 presents the results of the hierarchical regression analysis. Model 1 repre-
senting 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 R2 = .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, edu-
cational 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 R2 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 signifi-
cantly 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 het-
erogeneity 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.
Table 2
Hierarchical Regression Analysis Results
Variables Model 1 Model 2
Year of IPO .17** .17**

Hot market .11* .12*
Firm age -.04 -.06
TMT size .12* .06
Equity raised .19* .15*
Prior sales .38*** .39***
Team tenure -.13* -.11†
Underwriter reputation .40*** .39***
VC backing .12* .10*
Founder experience .03 .03
Entrepreneurial experience -.00 .02
Functional heterogeneity .17**
Educational heterogeneity .11*
Age heterogeneity -.06
Tenure heterogeneity -.02
R2 .533 .569
Adjusted R2 .501 .526
D R2 .04
F 16.320*** 19.443*
N = 172; † p < .10; * p < .05; ** p < .01; *** p < .001
Dependent variable = IPO value.
TMT, top management team; VC, venture capital; IPO, initial public
offering.

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 posi-
tively 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., Bantel, 1993; Glick et al., 1993; Hambrick,
1994; Hambrick & Mason, 1984; Williams & O’Reilly, 1998) in addressing the com-
plexities of publicly held firms.
Second, I found educational background heterogeneity to be positively and signifi-
cantly related to the capital raised through an IPO. The results suggest that TMT educa-
tional 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 surpris-
ing 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, net-
works, 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 rela-
tionship. 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
May, 2008 405

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. Inves-
tors, 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 consider-
ation 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.
Results of this study provide some implications for firms planning an IPO. In prepar-
ing for an IPO, firms may do well to structure their TMT so as to indicate to investors the
breadth of perspective of the TMT. Specifically, functional background and educational
background are predicted to benefit the amount of capital the firm raises at IPO. Investors
often invest in the TMT. A team that provides evidence of strength in managing its firm
because it has a broad perspective is an attractive investment opportunity. In addition to
heterogeneity I found support to predict that IPO firms that go public in a more established
industry and during a hot market with a larger team, have higher sales prior to IPO, have
a reputable underwriter, and with backing by reputable VC firms, will raise more capital
from an IPO, while having a team that worked together for a longer period of time will
raise less capital.
Limitations of this study include the focus on a single industry, a sample of IPOs that
went public during a period of increasing IPO activity, limited measures of performance
May, 2008 407

and heterogeneity, no available data on the team member exits, and the possibility of
endogenous variables. Although there are advantages to focusing on a single industry, the
unique characteristics of software firms may have influenced the results of this study and
so limit the generalizability of the results to firms outside the software industry. Insight
into the influence of TMT heterogeneity of IPO firms would benefit from future research
on other industries. This study examines firms that went public during a period of
increasing IPO activity, and so the relationships found in this study may not be general-
izable to all time periods. During the period covered by this study, 3,113 firms (from all
industries) went public, http://www.marketdata.nasdaq.com/asp/Sec3IPO.asp. However,
there was a variation in the number of IPOs by year, with a greater number of IPOs in 1993
and 1996. It is important to note that prior to 1993, the software industry was in its early
stage; an SIC code had only been assigned for software firms in 1987. Following the last
year covered in this paper, 1997, the IPOs of Internet-based firms dramatically caused an
increase in the number of firms that went public. The burst in the Internet bubble then
caused a significant decrease in the number of IPOs. Performance was measured in terms
of capital raised through an IPO. Future research could consider other measures of
performance in determining the value given by investors to heterogeneity such as under-
pricing and other stock-based/market-based measures of performance. The measures of
heterogeneity used in this study are also limited in scope and may be considered simplistic
proxies for concepts such as breadth of perspective and worldview. They do not measure
the degree and nature of conflict between members, aspects of TMTs known to influence
decision making and firm performance. More detailed measures of heterogeneity such as
worldview, strategic orientation, and goal orientation may provide greater insight into the
influence of the TMT on firm performance. In addition, I did not have available data on
exits of team members. Thus, I was unable to determine the signals provided by the exits
of team members (Ucbasaran et al., 2003) and the influence on heterogeneity. Finally,
there is the possibility of endogenous variables in the model. TMT heterogeneity may be
influenced by another variable, a variable that is also related to the ability of the firm to
raise capital through an IPO. For example, IPO firms with greater capital-raising prospects
may be more able to attract resources and so afford to build a more heterogeneous and
larger TMT. In addition, the positive relationship between IPO capital raised and hot
market may be due to the hot market driving the decision to go public at a specific time.
Future research may benefit from the examination of a firm’s resources, e.g., intellectual
capital, prior to the creation of the complete management team, as well as a hot market
driving the decision as to when to go public.
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1042-2587

The Influence of Top

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Sample and Data Collection

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Functional Heterogeneity. Functional background heterogeneity was calculated using

Educational Heterogeneity. Educational background heterogeneity was measured using

Age Heterogeneity. Age heterogeneity was calculated as the coefficient of variation of

Tenure Heterogeneity. Tenure heterogeneity was calculated as the coefficient of varia-

400 ENTREPRENEURSHIP THEORY and PRACTICE

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Entrepreneurial Experience. The positive relationship of prior entrepreneurial experi-

Founder Experience. The positive relationship of founders serving on the TMT of

402 ENTREPRENEURSHIP THEORY and PRACTICE

IPO value (1) 24.52 27.29 1.00

N = 172; * p < .05; ** p < .01

Hierarchical Regression Analysis Results

Variables Model 1 Model 2

Year of IPO .17** .17**

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Allison, P. (1978). Measures of inequality. American Sociological Review, 43, 865–880.

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410 ENTREPRENEURSHIP THEORY and PRACTICE

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Year of IPO .17 .17