IPO Firms Strategic Orientation and Incumbents' Performance.

• Author: Seth, Tapan

INTRODUCTION

The development and introduction of products and services by new ventures is often lengthy, mired with uncertainties, and requires the generation of specialized competencies (Haeussler et al., 2012; Nelson & Nelson, 2002). Therefore, it is essential for new ventures to select a suitable strategy and efficiently utilize their resources to compete against industry incumbents. In this regard, the strategic orientation of the firm can convey valuable information regarding the future performance of the IPO firm. Prior research has shown that investors' perception of a firm's strategic orientation can have an effect on the ensuing valuation during the IPO process (Shiller, 1989; Cohen & Dean, 2005; Shrader & Siegel, 2007). The two common strategic orientations used in literature are the entrepreneurial (EO) and marketing (MO) orientations (Covin & Slevin, 1991; Lumpkin & Dess, 1996; Kohli & Jaworski, 1990). Lumpkin and Dess (1996) defined EO as the "process, practices, and decision-making activities that lead to new entry" (p. 136) and is often viewed as the shared variance between firms' emphasis on innovativeness, risk-taking, and proactiveness (Covin & Wales, 2012). On the other hand, MO refers to an organizational culture that focuses on customers and competitors and emphasizes the generation, dissemination of, and responsiveness to market intelligence (Narver & Slater, 1990; Kohli & Jaworski, 1990). While research has shown a positive relationship between EO, MO, and incumbent firm performance (Rauch et al., 2009; Cano et al., 2004; Kirca et al., 2005; Wilbon, 2003; Gao et al., 2008), little research has explored how the strategic orientation conveyed by the IPO firm affects its rivals.

A newly public firm changes an industry's competitive landscape significantly. Research shows that newly IPO firms would cause the incumbents' performance to deteriorate (Hsu et al., 2010). In essence, IPO firms increase the competition within the industry, and, as a result, incumbents are negatively impacted. However, such a general characterization of competitive effects has not considered firm-specific characteristics of both the IPO, and the incumbent firms. According to the resource-based view, firms are seen to be composed of a bundle of resources that are assumed to be heterogeneously distributed across firms (Chen, 1996; Barney, 1991). Thus, each firm is considered idiosyncratic due to the different resources and assets it has acquired over time, and the various routines it has developed to manage them. IPO firms' strategic orientation would signal the decision-making style of Top Management Team (TMT), how the firm is organized, and how the resources gained from the IPO process would be utilized to discover and exploit opportunities (Lau et al., 2008). As the firms' strategic orientation would indicate varying market profiles and resource endowments, the effects of a newly IPO firm are not universally the same on different incumbents. Based on this, our research aims to enhance our understanding of the impact of the strategic posture of the IPO firm on the performance of its rivals.

We are able to make several contributions from this study. Our study contributes to the entrepreneurship research that focuses on the IPO event. Furthermore, our study extends current research of IPO events by examining the competitive effects of IPO on industry incumbents. More importantly, we analyze the firm-specific characteristics of the IPO firms and their competitors. We demonstrate that an IPO has a negative impact on the competition. The findings also suggest that shows that the strategic orientation of the IPO firms has a significant impact on the incumbent firms in the industry. Further, the diversity in the top management team at the IPO firms as well as the availability of free resources to the rival firms, moderate the effect of the IPOs.

THEORY AND HYPOTHESES

Firms primarily go public to raise equity capital and to create a market where shareholders can convert some of their wealth into cash at a future date (Ritter & Welch, 2002). Going public enables entrepreneurs to extract higher value for their firm than what they would get from an outright sale. IPO can add value to the firm, by inspiring more faith in the firm from other investors, customers, creditors, and suppliers. IPO recapitalizes the issuing firm in such a way that it generally results in a low debt-to-equity ratio. Low leverage may give issuing firms an advantage over their more highly leveraged competitors by allowing them more flexibility in their investments (Miller et al., 2015). Consequently, the IPO process has been observed to pose a competitive threat on incumbent firms in the industry (Hsu et al., 2010), as the emergence of new publicly traded firm will be expected to either force reduced margins of the rivals or will pull market shares from the rivals (Akhigbe et al., 2006). New IPOs prompt investors to reevaluate the competitive conditions in the industry and to recognize the possible competitive advantages possessed by the newly public firm. As Hsu et al. (2010) note, these advantages for newly-public firms may include the improved access to financing, their recent certification by underwriters, and their valuable knowledge capital, in comparison with incumbent firms.

While successful IPO can be beneficial to the issuing firm and often detrimental to incumbents, it is also well documented that information asymmetry exists between firm owners and potential investors during the IPO process security (Carter & Manaster, 1990; Brealey et al., 1977; Ross, 1977; Stuart et al., 1999). Whereas insiders possess in-depth knowledge of the new venture, outsiders tend to have limited knowledge of the IPO firm (Stuart et al., 1999). Additionally, factors such as technological uncertainty and the possibility of opportunistic behavior on part of the owners can worsen the information asymmetry (Sanders & Boivie, 2004). Research rooted in signaling theory (Spence, 1973) has shown that new ventures can send credible signals to the investment community, to influence their perception. In regards to the IPO process, research indicates that investors place importance on signals such as governance characteristics (Certo et al., 2003; Filatotchev & Bishop, 2002; Sanders & Boivie, 2004); venture backing (Gompers, 1996; Megginson & Weiss, 1991); founder presence (Nelson, 2003); reputation of underwriters (Carter & Manaster, 1990), or celebrity endorsements (Dean & Biswas, 2001), in valuing new ventures.

Recent research suggests that IPO firms' strategic orientation can be an important signal of firm value (Mousa et al., 2015; Seth & Chaubey, 2017). According to Noble et al. (2002) firm's strategic orientation serves as the context which influence its culture and exchanges with both customers and competitors. Within the strategic management literature, EO and MO are generally considered to be two fundamental strategic approaches the firm can take to achieve competitive advantage (Miles & Arnold, 1991; Atuahene-Gima & Ko, 2001). EO and MO are largely considered to be complementary orientations albeit representing two unique business philosophies (Miles & Arnold, 1991). EO typically characterizes the organizations response to future or probable needs (Hong, Song, & Yoo, 2013). Organizations that exhibit high levels of EO engage in considerable risk, innovation, and take proactive steps to develop new products and markets (Covin & Slevin, 1989; Miller, 1983). On the other hand, MO focuses on the development of superior customer value through intelligence generation, dissemination, and organizational responsiveness (Kohli & Jaworski, 1990; Narver & Slater, 1990). Thus while EO is associated with the identification and exploitation of opportunities, MO is considered to be more directly related to the customer satisfaction process (Baker & Sinkula, 2009).

This varying focus between EO & MO creates heterogeneity between IPO firms in terms of resources and capabilities that are developed to create a competitive advantage. For example, firms that emphasize entrepreneurial orientation are typically proactive and focus on internal processes and capabilities that enhance the creation of new products and services (Teece et al., 1997). On the other hand, market-oriented firms focus on capabilities that track the needs of the customers and enable the fulfillment of that need. Based on this, prior research has shown that a new venture's entrepreneurial orientation is negatively, and market orientation is positively related to performance at IPO (Mousa et al., 2015; Seth & Chaubey, 2017). Given that EO and MO signal different underlying strategies, it is important to understand how the IPO firm's strategic orientation affects investors' sentiment regarding the performance of rivals during the IPO event.

IPO Firms' Entrepreneurial Orientation and Rivals' Performance

Prior research shows that EO is a combination of three dimensions: innovativeness, risk-taking, and proactiveness (Lumpkin & Dess, 1996; Avlonitis & Salavou, 2007; Javalgi & Todd, 2011). According to Lumpkin and Dess (1996), innovativeness reflects firms' tendency to back novelty, experimentation, and the creative process; proactiveness refers to the ability to understand the future wants and needs of the market, thereby having the ability to capitalize on emerging opportunities; risk-taking reflects the willingness to commit resources in uncertain projects. While the above may suggest that EO has positive implications for the firm, in the case of IPOs strong EO signals have been shown to be negatively related to IPO performance (Seth & Chaubey, 2017; Moussa et al., 2015).

A high degree of EO at the time of IPO may signal a chance of developing a winning product that changes the competitive landscape; however, it may also signal heightened turbulence in firm performance (He & Wong, 2004). In the case of...