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STAKEHOLDER INFLUENCE ON THE ETHICS AND VIRTUES OF IPO FIRMS Michael S. McLeod Robert Evert *With support from the Texas Tech University Ethics Center

STAKEHOLDER INFLUENCE ON THE ETHICS AND VIRTUES OF IPO FIRMS

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ABSTRACT Organizational virtues are the cultural imprints of the firm that influence strategic decision-making. Drawing primarily on resource dependence theory, we examine how the espoused organizational virtues of a firm are influenced by stakeholders with resource power during transitioning periods, namely at the time of their IPO. More specifically, we empirically examine how venture capitalists and underwriters, as key stakeholders, affect the organizational virtue orientation espoused in the IPO prospectuses. We also test whether or not the age of the IPO influences this stakeholder-to-organizational virtue relationship. Using a sample of 204 IPO firm prospectuses, our findings demonstrate that venture capitalists and underwriters significantly influence IPO firms toward exhibiting more virtuous orientations. Additionally, firm age moderates the stakeholder-to-organizational virtue relationship such that older firms are less influenced by stakeholders controlling valuable resources.

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STAKEHOLDER INFLUENCE ON THE

ETHICS AND VIRTUES OF IPO FIRMS Michael S. McLeod

Robert Evert

*With support from the Texas Tech University Ethics Center

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Background

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Our Focus and Contributions

• Organizational ethics and virtues are important streams of research in entrepreneurship

• Major corporate scandals (i.e., Bear Stearns, Lehman Brothers, Enron, Tyco International)

• How do corporations, given their economic mission, manage ethics -- and who influences (Goodpaster, 1991)?

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Ethics in Organizations

• Growing research on virtues and entrepreneurial organizations

• Yet little accomplished on ethics and virtues in entrepreneurial processes such as IPOs (Daily, Certo, Dalton, & Roengpitya,

2003; Debicki, Matheme, Kellermanns, & Chrisman, 2009).

• Ample empirical evidence that IPO firms require unique finance, knowledge, and networking resources (Gompers & Lerner,

1999), but how these factors affect virtues and ethics are relatively under-explored in entrepreneurship. (Goodstein & Wright,

2007; Payne et al., 2011)

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The IPO Context

• This context is important -- ethics and virtues salient to IPO firms that rely on stakeholders (i.e., venture capitalists, underwriters)

• Unique relationship created during the IPO process

• Hence, we:

• consider previously neglected topic of stakeholder influence on organizational ethics and virtue.

• advance understanding of how and in what ways key stakeholders influence change in organizational virtue.

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Theory

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Resource Dependence Theory

• Resource dependence theory (RDT) used to examine stakeholder influence on strategic decision-making and impact on firm performance (Buysse & Verbeke, 2003; Freeman & McVea,

2001)

• More relevant to our effort, literature also has considered the influence that stakeholders have on firm morality and ethical orientation (Parmar et al., 2010; Rodgers & Gago,

2001)

• It follows that RDT also explains how stakeholders influence organizational virtues…

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IPO Firms, Venture Capitalists, and Underwriters

• RDT at the heart of IPO and entrepreneurship research!

• Firms are reliant on resources during the IPO process (Frooman, 1999)

• VCs have financial, knowledge, and network resources (Polat & Wadhwa, 2008; Zider, 1998)

• Offerings of equity incentives (Westerman, Geiger, & Cyr, 2008)

• CEO turnover (Polat & Wadhwa, 2008)

• Ownership structure of target firms (Campbell & Frye, 2006)

• UWs have prestige as a resource (Carter & Manaster, 1990)

• Due diligence required by investors (Carter & Manaster, 1990)

• Institutional image and reputation (Agrawal & Cooper, 2010)

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Hypotheses

Hypothesis 1: VC level of involvement positively influences the organizational ethics and virtues of an IPO firm.

Hypothesis 2: Underwriter prestige positively influences the organizational ethics and virtues of an IPO firm.

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Firm Age as a Moderator

• For investors – as firms age, performance uncertainty is alleviated (e.g., Deeds, DeCarolis, & Coombs, 1997; Zimmerman & Zeitz, 2002)

• Seasoned firms have substantive financial histories, making them less risky (Daily et al., 2003)

• Presents a problem for nascent IPO firms (Gulati & Higgins, 2003)

• For stakeholders -- firm age has been associated with size, inertia, and resistance to change.

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Hypotheses

Hypothesis 3: IPO firm age will moderate the relationship between VC involvement and organizational ethics and virtues of an IPO firm, such that older IPO firms will be influenced less by VCs than newer IPO firms.

Hypothesis 4: IPO firm age will moderate the relationship between UW prestige and organizational ethics and virtues of an IPO firm, such that older IPO firms will be influenced less by UWs than newer IPO firms

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Model

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Methodology

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Methodology

Sample• Examined IPOs declared between 2010 and 2012

• 204 final prospectuses IPO firms • Pulled additional information from SDC database • Excluded firms with stock listings resulting from mergers or

acquisitions and spin-offs of publicly-listed firms (Moore et al., 2012)

Why IPOs?• Entrepreneurial context• Transitioning period – More open to change• Obvious powerful stakeholders during the IPO: UWs and VCs

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Methodology

Dependent Variable: Organizational Virtue Orientation (OVO)– Content-analysis measure of OVO developed by Payne and colleagues (2011)

Six dimensions of organizational virtue: Integrity

Honest, Sincere, Socially-Responsible, Trustworthy

Empathy Concerned, Reassuring, Supportive, Sympathetic

Courage Ambitions, Achievement-Oriented, Leading, Competent

Warmth Friendly, Open, Pleasant, Straightforward

Conscientiousness Reliable, Hardworking, Proud, Secure

Zeal Exciting, Innovative, Imaginative, Spirited

(Chun, 2005)

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Methodology

Independent Variable: Venture Capitalist Involvement Ownership Equity Proportion (cf. Morris, Watling, & Schindehutte, 2000)

Independent Variable: Underwriter Prestige UW prestige index (Loughran & Ritter, 2004)

Scale of 0-9

Moderating Variable: Firm Age Firm inception to date of IPO issue

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Methodology

Control Variables: Firm net proceeds Pre-money market valuation 90-day market valuation 180-day market valuation Risk factors % of founder ownership (Pre-IPO) % of insider ownership (Pre-IPO) CEO Duality Founder-CEO Board Independence

Ordinary Least Squares (OLS) Widely used and versatile dependence technique, applicable in various

facets of organizational research

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Results

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Results

Hypothesis 1 was supported VC’s increased level of involvement is associated with OVO β = 3.395466*

Hypothesis 2 was supported UW’s increased level of prestige is associated with OVO β = 598.4934*

Hypothesis 3 was supported Firm age moderated the relationship of VC involvement with OVO β = 7.006503**

Hypothesis 4 was supported Firm age moderated the relationship of UW prestige with OVO β = 849.3213**

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Discussion

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Discussion

VCs and UWs value the perception of ethics and virtues in the IPO process

Near immediate impact of UWs on a firm’s virtues Importance of top-management teams? In what other ways do organizational ethics and virtues influence

aspects of the IPO process?• Higher OVO leads to higher IPO performance (Payne et al., 2013)

• VCs and UWs value the perception of ethics and virtues

Other orientations?

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Dimensions Content Analysis Words

Integrity authentic, believable, credible, creditable, decent, devoted, earnest, equitable, ethical, even-handed, fair, faithful, forthright, genuine, highly-respectable, honest, honorable, ingenuous, law-abiding, lawful, loyal, objective, principled, resolute, respectable, sincere, socially-responsible, transparent, true, trusted, trustworthy, trusty, truthful, upright, upstanding, values-based, virtuous

Empathy accepting, aidful, assuring, caring, charitable, compassionate, considerate, empathetic, encouraging, forgiving, helpful, humane, kind, listening, merciful, patient, ready-to-help, supportive, sympathetic, thoughtful, tolerant, understanding, well-being

Warmth agreeable, amiable, benevolent, cordial, courteous, diplomatic, familiar, friendly, generous, genial, gracious, grateful, hospitable, neighborly, open, pleasant, polite, receptive, straightforward, tender

Courage achievement-oriented, adept, aggressive, aspiring, assertive, bold, brave, capable, climbing, competent, courageous, daring, desirous, determined, effectual, enduring, enterprising, entrepreneurial, exploitative, foremost, goal-oriented, hardy, heroic, hungry, impenetrable, in-charge, knowledgeable, leading, overcoming, prevailing, ready, self-reliant, skilled, skillful, staunch, stout, striving, strong, tenacious, topmost, top-ranked, valiant, valorous, willful

Conscientious-ness

accomplished, accountable, accurate, attentive, at-work, businesslike, bustling, busy, careful, certain, confident, conscientious, conscionable, Customer-centric, demand-ing, dependable, detailed, diligent, dutiful, effective, efficacious, efficient, engaged, hard-working, heedful, impressive, judicious, laudable, meticulous, mindful, notable, painstaking, persistent, planning, praiseworthy, prepared, productive, protected, proud, regardful, reliable, reputable, responsible, scrupulous, solicitous, stable, stead-fast, steady, thorough, tireless, unfailing, value-added, vigilant, watchful

Zeal

alive, anxious, ardent, astonishing, avid, breakthrough, captivating, compelling, creative, dazzling, dogged, dynamic, eager, electrifying, energetic, enthusiastic, enticing, exceptional, excited, exciting, extraordinary, fabulous, fascinating, fervent, fiery, gung-ho, impassioned, ingenious, inspiring, intriguing, invigorating, lively, novel, passionate, provocative, reinvigorated, renewed, resourceful, revolutionary, rousing, spirited, stimulating, stirring, thrilling, transformative, trendsetting, uncon-ventional, unprecedented, vehement, vigorous, visionary, vivacious, vivid, zealous

Word Lists for Organizational Virtue Dimensions

Organizational Virtue Orientation Word Lists