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A knowledge-based view of IPO success: superior knowledge, isolating mechanisms, and the creation of market value.

Knowledge 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:

Hypothesis 1: The extent of expertise possessed by the top management team within an entrepreneurial threshold firm will be positively associated with IPO success.

TMT Personal Ties. Recent developments in the literature on social capital suggest that the knowledge available to actual or potential entrepreneurs is not limited to the knowledge personally held by them. Rather, individuals have access to an extensive external knowledge base which is embedded within their personal networks (Anand et al., 2003). For example, Nahapiet and Ghoshal (1998) examine the role of social capital in the creation of intellectual capital and conclude that "who you know affects what you know" (1998: 252). In general, it is well established in the management literature that social networks can serve as valuable conduits of knowledge and data. Within the context of a new venture, Florin, Lubatkin, and Schulze (2003) argue that social capital and networks reduce the time and effort necessary to obtain critical knowledge, and that the richness of the venture's external network will determine the amount of knowledge the venture will obtain.

While this knowledge via social ties may not be accessible at the moment of "discovery," it is certainly available to the entrepreneur or entrepreneurial team as the venture develops from its initial conceptualization to its continued implementation. Thus, in the development of a venture, the possession of superior knowledge is likely a function of both personal knowledge and the knowledge available to the venture via its network ties. This knowledge will impact top management team's ability to exploit a particular market opportunity, and should therefore increase the likelihood of the venture generating economic returns. More formally, this suggests the following hypothesis:

Hypothesis 2: The extent of personal ties maintained by the top management team within an entrepreneurial threshold firm will be positively associated with IPO success.

Isolating Mechanisms and IPO Success

As we stated in the previous section, the extent to which there might be impediments to future competition is also anticipated to influence IPO success. A line of research suggests that these impediments can be called "isolating mechanisms," and that they may serve as ex-post limits to competition in a market (e.g., Rumelt, 1987). In this study, we focused on three prominent isolating mechanisms: (1) intellectual property rights through patent protection, (2) organizational reputation, and (3) contractual alliances, since these have been found to influence IPO success to varying degrees in the previous literature (Rumelt, 1987).

Patent Protection. Intellectual property rights refer to legal protections afforded to inventor(s) of new ideas. Intellectual property rights take the form of patents, copyrights, and trademarks. Intellectual property laws give inventors and authors a temporary, exclusive right to their original works which remedies certain public goods problems (Arrow, 1962), and they allow creators to obtain excess economic returns on their investment. In this study, we focus on the limits to competition provided by patent protection, as potential investors may value the knowledge protection that this affords.

Patent laws and protections were originally designed to inspire and reward the genius of inventors, but in recent years they primarily benefit industrial laboratories and major corporations (Perelman, 2003). While researchers and policy makers debate the merits of patent protection, all agree that the owners of valuable patent rights obtain supernormal profits during the years of protection, and the broader the protection, the higher the economic rents generated (Dumont and Holmes, 2002). Furthermore, when new ventures have numerous and broad patents, they often have access to superior complementary capabilities such as capital, advertising, and production expertise (Lee, 2004). Thus, we expect intellectual property possessed by the new venture to be a determinant of IPO success due to its ability to isolate the threshold firm from future competition. In other words:

Hypothesis 3: The extent of patent protection controlled by an entrepreneurial threshold firm will be positively associated with IPO success.

Organizational Reputation. Organizational reputation can also be an important constraint on competitive imitation (Rumelt, 1987). Reputations are important to firms because they signal various positive characteristics about the firm, and therefore increase the willingness of stakeholders to support the firm (Fombrun and Shanley, 1990). They are particularly important to entrepreneurial threshold firms because they are attempting to overcome the so-called "liability of newness" (Stinchcombe, 1965). Due to the extra challenges of being an unproven start-up firm with limited history, legitimacy concerns are critical to success (Lester et al., 2006). For this reason, endeavors to overcome the liability of newness and to establish concrete organizational legitimacy may be regarded as a critical success factor. Consequently, the firm's reputation can be an exceptionally important determinant of IPO success through inter-organizational endorsements (e.g., Gulati and Higgins, 2003) and credibility management (e.g., Zhu et al., 2006).

With respect to future buyers, organizational reputations can signal superior product quality and thereby help to resolve information asymmetries between the firm and buyers (Spence, 1976). For similar reasons, positive reputations may also help attract investors, employees, and suppliers (Carter and Manaster, 1990). The organizational reputation, as a form of an intangible, knowledge-based asset, is important because of the unique relationships between the entrepreneurial firm and its various stakeholder groups. But most importantly to this study, organizational reputations may serve as an ex-post limit to competition.

As an intangible resource, reputations are often difficult to imitate (Barney, 1991) and thereby sometimes act as a mobility barrier (Caves and Porter, 1977) or an ex-post limit to competition (Rumelt, 1987). They are typically built over time through various interactions of the firm, the media, and other stakeholders (Shane and Cable, 2002). They may also be the result of idiosyncratic events which may not be easily imitated or duplicated. Firms which develop entirely new product categories have a unique ability to create powerful brand and corporate reputations. Similarly, high-tech firms which are on the cutting edge of a particular technology may have an advantage in attracting employees excited by the prospects of the emerging technology. The ability of reputation to serve as a barrier to imitation and, hence, an isolating mechanism, suggests that it could be another determinant of IPO success.

Hypothesis 4: The reputation of an entrepreneurial threshold firm will be positively associated with IPO success.

Contractual Alliances. The relational view of competitive advantage posits that a firm's critical resources extend beyond firm boundaries to include resources generated by relationships with other organizations (Dyer and Singh, 1998). Central to this perspective is that such relational resources may generate barriers to imitation, and consequently create isolating mechanisms which preserve profits of networked organization from imitation by competitors. The generation of ex-post limits to competitive imitation from such relational resources may be due to a variety of factors including causal ambiguity, time compression diseconomies, inter-organizational asset interconnectedness, partner scarcity, resource indivisibility, and social complexity. Most critical to this study, the knowledge and the access to knowledge sources embedded in these inter-organizational assets may serve as an isolating mechanism. Within the context of new ventures it seems that time compression diseconomies, inter-organizational asset interconnectedness, and partner scarcity derived through special contractual commitments with external partners may be particularly important (Grant and Baden-Fuller, 2004).

As new ventures develop, they build key relationships with a variety of external constituencies such as buyers, suppliers, and owners of complementary assets. The inter-organizational assets are expected to build ex-post limits to competition since they may be difficult to imitate, at least in the short run, for the following three reasons. First, such relations may be subject to time compression diseconomies (Dierickx and Cool, 1989), as relationships and trust between firms cannot develop quickly. Second, to the extent that such relationships are limited by the potential number of available partners (scarcity), first mover ventures have the capability of locking in partners and thereby preventing competitive imitation (MacPherson et al., 2004). Finally, as partners build external organizational relationships over time, they often invest in relationship-specific assets which prevent these firms from making arrangements with competitors of the new venture (Dyer and Singh, 1998). Together, these arguments support the view that contractual alliances with strategic partners may serve as an isolating mechanism and therefore enhance the prospect of sustained IPO success.

Hypothesis 5: The range of contractual alliances between an entrepreneurial threshold firm and external strategic partners will be positively associated with IPO success.

METHODOLOGY

We tested our knowledge-based model of IPO success on a sample of threshold firms in the computer-based product and service industry in 1997. We chose this industry to control for unique industry effects, but capture a broad array of threshold firms. Furthermore, the knowledge-based nature of technological developments and emerging market needs in this industry contributed to the condition of uncertainty and increased the likelihood of entrepreneurial opportunity and thus the possibility of economic returns. We focused on a single year in order to control for variable market conditions which have been found to influence IPO valuations (e.g., Gulati and Higgins, 2003).

Data Collection

The sample includes eighteen four-digit industry categories from the Standard Industrial Classification Index (SIC). A total of 150 computer-related new ventures underwent an IPO in 1997, as determined by comparing records in the Wall Street Journal and an online database company, IPO Data System. These IPOs represented over 20% of all IPOs for that particular year and included such well-known firms as Amazon.com and Rambus. To maintain a homogenous sample and to focus on new entrepreneurial ventures, foreign IPOs and firms over 12 years of age were excluded from the sample. Twelve years served as our cut-off point because firms older than ten years have been shown to be very different from new entrepreneurial ventures (Hisrich et al., 2005). Finally, cases with missing data were eliminated after putting forth appropriate and diligent efforts to collect needed data. Our final sample included 103 cases.

All of these firms were in the early stages of their organizational life cycle (Boeker and Wiltbank, 2005). While the ages of our sampled firms ranged from one to 12 years, the majority (nearly 70%) of these firms were under five years old. Furthermore, none of the firms had previously gone public and all were in "start-up" mode. So, while our ten-year-old firms were undoubtedly different from our one-year-old firms, this sample was sufficiently homogenous to proceed.

Variables and Measures

IPO Success. We defined IPO success as market value created in the venture up to the point of the IPO. Market value created can be gauged by the value of the firm above the cost of the tangible assets needed to create it (Rumelt, 1987). In this study, we utilized Tobin's Q as a measure for the market value, or what we call short-term IPO success in this study. In the organizational science literature, there have been many studies regarding economic value of firms. Specifically, Tobin's Q estimates the ratio between the market value of the firm and the replacement cost of its assets (Welbourne and Andrews, 1996). Scherer and Ross (1990) suggested calculating Tobin's Q as

[M.sub.c]-[M.sub.p]+[M..sub.d]/[A.sub.g]

where:

[M.sub.c] = Market value of common stock

[M.sub.p] = Market value of preferred stock

[M.sub.d] = Total value of outstanding debt

[A.sub.g] = Cost of replacing assets

While adopting Scherer and Ross's operational definition of Tobin's Q, this research used a proxy for Tobin's Q, similar to Lang and Stulz (1994), which is

TA - BVC + MVC - DT/TA

where:

TA = Total assets from the "Pro forma as adjusted" statement in an IPO prospectus.

BVC = Book value of common = total equity of shareholders = (sum of the par value + capital surplus + retained earning), and all of these raw data from the "Pro Forma as adjusted" statement in IPO prospectus.

MVC = Market value of common = stock prices (the closing price of the seventh trading day) X total number of outstanding stocks, and these data from the CRSP.

Deferred taxes (DT) were largely immaterial for IPO ventures, so DT was omitted in the final measure.

We measured Tobin's Q seven days after the new ventures' stock initially went public. The timing of this measurement is important, as an early measurement (i.e., one or two days) will not reflect the true market value of the firm. The initial offering price, for example, is typically substantially lower than the eventual market price. On the other hand, waiting too long after the IPO (i.e., 30, 60 or 360 days) is inappropriate because it increases the likelihood that post-IPO events will influence the price of the stock. Furthermore, previous research has shown that an IPO's market price stabilizes shortly after it is introduced to the market (Dark and Carter, 1993). Thus, we selected the seventh trading day after the new venture's stock initially went public.

TMT Expertise. As discussed previously, we cannot expect to know, a priori, of the existence of superior knowledge with respect to a given opportunity since, if we did, the knowledge imperfection required for the continued existence of that opportunity would cease to exist. Thus, measures of knowledge are best operationalized as factors which might indirectly contribute to the likelihood of an individual entrepreneur or group of founders possessing such knowledge.

For this study, our operationalization of TMT expertise focuses on various characteristics of the venture's top management team, which may be argued to predict the existence of superior knowledge with respect to a given market opportunity. Furthermore, we follow Shane (2000) in suggesting that the nature of the necessary knowledge includes that of the nature of markets and the means of serving them. Specifically, we operationalized TMT expertise as a function of the top management team's (TMT) education, prior industry experience, and prior TMT experience, as we believed that each of these would contribute to the TMT's prior knowledge of the nature of the market and ways of serving it.

Our measure of TMT expertise is a factor score composed of three areas of expertise. It includes data on: (1) the total number of top management team members who had relevant industry (a computer or computer-related industry) experience, (2) the total number of TMT members who had prior TMT experience, and (3) the total number of TMT members who possessed advanced degrees (at least Master level or equivalent). Measuring the component variables as counts of TMT members follows the approach of Florin et al. (2003) and Cohen and Dean (2005). Using the principal components extraction and varimax rotation, a single factor with eigenvalue greater than one was obtained that explained approximately 67% of the variance in the three variables. The data for three TMT variables were collected from IPO prospectuses and 10-K fillings.

TMT Personal Ties. Our second measure of superior knowledge is TMT personal ties. The extent of TMT personal ties was considered to be a function of the total number of formal linkages between members of the top management team and valuable outside connections. Following Geletkanycz and Hambrick (1997), we operationalized TMT personal ties as the total number of outside companies in which a new venture's top management team served on the board of directors. These data came from each firm's IPO prospectus, and were logarithmically transformed to reduce skewness in the distribution.

Patent Protection. The isolating mechanism of patent protection was operationalized as the total number of patents issued at the U.S. Patent and Trademark Office as of the end of 1997. Among the various types of intellectual property protected by law, patents provide one of the strongest property rights for aspects of competitive advantage that are most relevant in the computer industry.

Organizational Reputation. The reputation of the organization, another potential isolating mechanism, can be thought of as the net effect of positive and negative perceptions regarding the organization at any one time. To measure the new ventures reputation, we collected and analyzed news reports. Specifically, we began our search by using keyword searches of the 103 companies in our study for a two-year period (1996-97) in the Wall Street Journal (WSJ) on-line archive. This search resulted in 567 articles for the 103 firms, or approximately 5.5 articles per firm.

Next, two coders read and coded WSJ articles for each of the first ten new ventures in our study--classifying each article as providing either a "positive," "negative," or "neutral" perspective on the firm while using a keyword protocol of positive and negative words as guidance. One of the coders was an author of this study, while the other coder was a doctoral student who was unfamiliar with the purpose of this study. Since both coders provided identical coding results for the first ten firms, the coder who was not a member of the research team completed the coding of the remaining 93 firms by himself. Ultimately, the organizational reputation measure was computed as the total number of positive WSJ articles (endorsing connotations) for the two-year period (1996-1997).

Contractual Alliances. Similar to Gulati and Higgins (2003) in their recent study of IPO success, we measured contractual alliances as the log of the total number of formal interorganizational alliances between the new venture and external firms. The data came from a content analysis of PR Newswire articles during 1996 and 1997. This number included the number of alliance partners, joint venture partners, channel partners, licensees, franchisers, and any specific long-term contract identities.

Control Variables. To exclude the possible influences from exogenous variables which were beyond the study's interest, three control variables were used. They are: (1) venture size, (2) venture capital backing, and (3) equity market conditions. Consistent with Gulati and Higgins (2003), venture size was measured as the total number of employees as disclosed in the IPO prospectus. To reduce skewness, the logarithmic transformation was taken to yield our final measure. We also controlled for venture capital backing with a dichotomous variable which was set equal to "1" if the new venture received equity financing from a venture capitalist and "0" if not, similar to Bygrave and Timmons (1992). To control for general equity market effects on IPO valuations, we also collected an equity market index (Deeds et al., 1997). The Standard & Poor's index for the date of the firm's IPO was used as the value for this measure, and it was obtained from the CRSP database.

RESULTS

This section discusses the results of our empirical tests. As can be seen in Table 1, there are a number of significant correlations between the independent variables. As a result of these numerous inter-correlations between the independent variables, we tested our data for multicollinearity. In all regression models (Model 1, 2, and 3), the highest VIF score was 1.58, which was within acceptable parameters. As a result, we are reasonably confident that there is not a multicollinearity problem with our data.

We tested our hypotheses using hierarchical regression analysis where we first entered the three control variables (Model 1), followed by the two "superior knowledge" predictors (Model 2), and, finally, the three "isolating mechanism" predictors (Model 3). The empirical results show a significant effect of the three control variables for Model 1 in Table 2 (F = 2.00, p < .05). To test contributions of superior knowledge, we added two predictors in the next hierarchical regression equation. As can be seen in Model 2 within Table 2, this regression was also significant (F = 4.18, p < .01), and explained 14% of the variance in IPO success. Notably, the addition of the two superior knowledge variables increased the variance explained by 11% (p < .001).

Interestingly, our data showed a strong and positive contribution of the TMT Expertise variable in its relationship with IPO Success (t = 1.77, p < .05). Also, TMT Personal Ties has strong and positive relationship with IPO Success (t = 2.42, p < .01). Consequently, our data showed strong and positive contributions of the TMT's superior knowledge and our first two hypotheses are supported by our data.

In the next step of the regression, we added the three isolating mechanism variables. These results are shown in Model 3 in Table 2. The final model explained 27% of the variance in IPO Success and was significant (F = 5.74, p < .01). Notably, adding the isolating mechanisms variables increased the variance explained by 14% (p < .01).

Two of the three hypotheses on isolating mechanism variables were supported by our data. The regression coefficient for Patent Protection was positive, as hypothesized, and significant (t = 3.88, p < .01). Furthermore, the coefficient for Organizational Reputation was also positive and significant (t = 1.81, p < .05). Thus, our data suggested significant contributions of ex-post limits to competition in the form of isolating mechanisms, and our data suggested important predictive power for the contribution of ex-post limits to competition variables ([DELTA][R.sup.2] = 14%, p < .01), above and beyond superior knowledge variables (ex-ante limits). Interestingly, our data did not support the ex-post limits to competition variable known as Contractual Alliances. These results will be discussed below.

CONCLUSIONS AND DISCUSSION

We began this study with a discussion about firms as knowledge-creating entities, and the knowledge-based view (KBV) of competitive advantage as a particularly promising perspective for understanding the knowledge flows surrounding initial public offerings. In general, we found that the KBV was quite robust in helping to frame and explain the creation of economic value for initial public offerings in new computer-related firms in the mid-1990s.

Specifically, given that information of the nature of market opportunities is not equally distributed throughout potential economic actors (Kirzner, 1973; Shane and Venkataraman, 2000), superior knowledge possessed by TMTs appears to be a important determinant of IPO success. Our data suggest that superior knowledge is relevant throughout the development of the venture, not just at the point of discovery. Similar to Shane and Stuart (2002), our results suggest that the importance of superior knowledge extends beyond the founder to other members of the firm, and even beyond the boundaries of the firm as a result of the interpersonal networks of the top management team. As such, successful entrepreneurship appears to be the culmination of "great groups" of individuals over an extended period of time, rather than the heroic flash of genius by a single individual (Bennis and Ward, 1999).

In addition, we also found that ex-post limits to competition in the form of knowledge-based isolating mechanisms are necessary to assure the public markets that the competitive advantages are sustainable. Both patent protection and the new ventures' reputation had significant and positive impacts on IPO success in our model. The impact of patent protection was especially strong, and this corroborates prior studies on the role of intellectual property and patents in the performance of ventures (Lee et al., 2001). Through legal protection, such as patents and copyrights, ventures generate economic returns through relatively explicit or codified knowledge since the legal protections shape systematic ex-post limits to competition (Cowan and Foray, 1997).

Our finding with respect to organizational reputation likely results from less tangible knowledge-based sources. As Rumelt (1987) indicated, organizational reputation is embedded in product, company history, and customer experiences, and is a critical element of ex-post limits. Reputation creates limits to competition because intangibility makes it difficult to replicate. Thus, our results support the importance of both intangible (e.g., organizational reputation) and more tangible knowledge-based isolating mechanisms (e.g., patents) in the generation of IPO success.

According to our data, it does not appear that the range and extent of inter-organizational alliances limits ex-post competition. It may be that the quality and nature of the inter-organizational alliances are much more important than the quantity of alliance partners, as Shane and Cable (2002) also suggest. As such, future research may want to consider a more fine-grained analysis of alliance quality and its impact on competitiveness and IPO success.

Despite these relatively robust findings, we must exercise caution in generalizing these results for several reasons as well as advocate some additional research suggested by this study. First, we believe that the scope of our predictor variables is somewhat limited in the sense that we have not captured the full range of ex-ante superior knowledge or ex-post limits to competition (isolating mechanisms). AS discussed above, any measure of superior knowledge must be limited to factors likely to influence the discovery of a given entrepreneurial opportunity. Nonetheless, we may be able to utilize other or more specific measures than those used in this particular study. For example, we may be able to match specific information about technologies and thereby determine the origin of the superior knowledge more precisely. This may also lead us to recognize new combinations of knowledge which are necessary for the formation of new ventures.

Also, some entrepreneurial threshold firms may possess some unique knowledge outside of the top management team that is critical to its future success. While the TMT might be critical to keeping that knowledge within the firm and exploited properly, the TMT is only an indirect reflection of the superior knowledge within the firm. Consequently, future research should investigate knowledge possessed throughout the entire firm to obtain a more comprehensive understanding of the superior knowledge construct. In addition, this study did not differentiate between the types of knowledge possessed by the top management team--such as technological versus business expertise. Hence, future research should conduct a finer grained analysis of these various types of knowledge.

There also remains a question of the extent to which external ties influence the generation of superior knowledge in new ventures. While the current examination highlights the potential of TMT personal ties to help generate knowledge of market opportunities, many more questions may be asked regarding the role of knowledge embedded in such ties in the process of entrepreneurial discovery and development throughout the entire organization, especially in the high-technology sector.

A third potential limitation of this study is the timing of this study. Since our data were collected in the latter part of the 1990s, the stock market was growing rapidly and investors were relatively "bullish." Previous research by Gulati and Higgins (2003) suggests that general market conditions can affect market success, so we controlled for a single year. However, it would be interesting to investigate these same relationships in a "bear" market period, such as in 2001. As such, we might find different predictors of success.

Despite these limitations, our study provides a number of contributions to the literature. Foremost among these is the contention that the knowledge-based view (KBV) of initial public offerings is an effective framework for predicting IPO success. Our results refine and extend Simsek's (2003) recent field study of

a wide variety of new entrepreneurial ventures utilizing the KBV. To our knowledge, these are the only two empirical studies to use a knowledge-based perspective to describe and explain the predictors of entrepreneurial firm performance. Given the relatively robust results in both of these studies, we encourage others to build upon this promising base.

Second, we measured IPO success using a market measure, rather than more traditional accounting or self-assessed measures of success. This operationalization is not only more theoretically appropriate because it is future-oriented (rather than focused on the past), but it is also a more valid and reliable measure of the anticipated competitive advantages and ultimate firm performance in the future. Welbourne and Andrews (1996) found that human resource policies were associated with IPO success, and we refined and extended this notion by exploring a broader array of knowledge-based assets.

Third, this study provides some important ideas and insights for practitioners. For entrepreneurs, our study suggests that the quality and range of knowledge possessed by the top management team is important to future success. As a result, relying on a single brilliant founder is generally not a prescription for success. Furthermore, the top management team not only helps to attract, create, and disseminate important knowledge for future success, but it also serves as a critical signaling mechanism to outside investors. Consequently, an emerging ingredient for entrepreneurial success in the future may rely more on the founder's team-building skills than on more traditional notions of intellectual brilliance and/or technological expertise.

Also, the extent of patent protection appears to also be important to future IPO success, despite the competitive disadvantages created by public disclosure of the firm's unique technologies (e.g., public accesses to the United States Patent and Trademark Office). As such, investing in and protecting intellectual property still appears to matter, even though investment capital is quite limited in the early stages of the firm. Finally, the firm's reputation appears to have material impacts on the future success of the firm. This implies that intangible value is created through awareness and favorable impressions of the firm with its various stakeholder groups. In other words, reputation can serve as a competitive advantage in today's marketplace and it should be consciously nurtured and protected by everyone in the firm.

In addition, we call for a stream of future research in this area with more comprehensive measures in superior knowledge and isolating mechanisms (particularly a firm-level knowledge) and with different timeframes and industry settings. As we move into an increasingly knowledge-based economy, the knowledge-based perspective should be of increasing value to social scientists.

In summary, this study provides a unique perspective on predictors of IPO success within the computer industry. We find that knowledge-based predictors are relatively robust in explaining IPO success. We believe that this study contributes not only to the entrepreneurship literature, but also the knowledge-based view of the firm. In so doing, we hope that our ideas may assist future entrepreneurs be more successful as they seek to build the markets and organizations of tomorrow.

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Seung B. Bach

Assistant Professor of Entrepreneurship and Strategic Management

California State University--Sacramento

William Q. Judge

Professor of Strategic Management

Old Dominion University

Thomas J. Dean

Associate Professor of Strategy and Entrepreneurship

Colorado State University
Table 1
Descriptive Statistics and Correlations
(N = 103)

 Std.
 Variables Mean Dev. 1 2 3

1 IPO Success 3.76 2.04
2 Organizational Size 235.95 462.33 .03
3 Equity Market
 Conditions 876.78 77.11 -.09 .20 *
4 Venture Capital
 Backed .81 .39 .16 -.12 -.05
5 TMT Expertise 0.00 1.00 .32 ** .19 * .05
6 TMT Personal Ties 4.63 5.21 .45 ** .13 -.07
7 Patent Protection .88 3.94 .40 ** -.06 -.01
8 Organizational
 Reputation 4.96 5.29 .36 ** .04 -.13
9 Contractual
 Alliances 6.79 12.14 .16 .13 .01

 Variables 4 5 6 7 8

1 IPO Success
2 Organizational Size
3 Equity Market
 Conditions
4 Venture Capital
 Backed
5 TMT Expertise .13
6 TMT Personal Ties .21 * .46 **
7 Patent Protection .11 .13 .03
8 Organizational
 Reputation -.02 .34 ** .32 ** .14
9 Contractual
 Alliances .08 .45 ** .45 ** -.03 .47 **

* p <.05; ** p < .01.

Table 2
Hierarchical Regression Models on IPO Success
(N = 103)

 Model 1

Variables Beta T-value

Controls:
 Organizational Size .16 1.65 ([dagger])
 Equity-Market Conditions -.11 -1.08
 Venture-Capital Backed .15 1.55 ([dagger])

Superior Knowledge:
 TMT Expertise
 TMT Personal Ties

Isolating Mechanisms:
 Patent Protection
 Organizational Reputation
 Contractual Alliances

Adjusted R-Square .03
F-value 2.00
Adjusted R-Square Change

 Model 2 Model 3

Variables Beta T-value Beta T-value

Controls:
 Organizational Size .02 .20 .01 .04
 Equity-Market Conditions -.09 -.97 -.05 -.60
 Venture-Capital Backed .04 .44 .02 .17

Superior Knowledge:
 TMT Expertise .19 1.77 * .07 .69
 TMT Personal Ties .27 2.42 *** .21 2.09 *

Isolating Mechanisms:
 Patent Protection .34 3.88 ***
 Organizational Reputation .19 1.81 *
 Contractual Alliances .06 .57

Adjusted R-Square .14 .27
F-value 4.18 *** 5.74
Adjusted R-Square Change .11 *** .14 ***

([dagger]) p < .10; * p <.05; *** p < .001.
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Title Annotation:initial public offerings
Author:Bach, Seung B.; Judge, William Q.; Dean, Thomas J.
Publication:Journal of Managerial Issues
Geographic Code:1USA
Date:Dec 22, 2008
Words:7961
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