Bringing institutional theory and the signalling effect of patents in the debate, we investigate how to avoid IPO underpricing in different appropriability regimes. Empirical evidence remains that in the industry with a transparent link between R&D expenditures and value appropriation, the level of R&D expenditures does not even have a negative impact on IPO underpricing and a venture’s patent stock effectively mitigates investors’ concerns of its future prospect. Conversely, when the transparency of innovations to future returns is not clear, the endowment of legitimacy is extremely prevalent for new ventures, especially for high-tech IPOs. It serves as a credible and observable signal for investors to make accurate assessment of firm value. Post hoc analysis shows that endorsing legitimacy does decrease the level of IPO underpricing caused by innovation-based information asymmetry, proxied by the R&D expenditures of ventures. We examine the relationships in a sample of 770 IPOs. The result extends information asymmetry theory by considering institutional prospective and by contextualizing firm information. It also contributes to institutional theory by showing how this theory contributes most to our understanding of firm behaviour in the absence of well-functioning markets (such as the market for technology).
|Frontiers of Entrepreneurship Research
|Published - 16 11月 2018