Signaling Organizational Virtue: an Examination of Virtue Rhetoric, Country‐Level Corruption, and Performance of Foreign IPOs from Emerging and Developed Economies

• DOI: http://doi.org/10.1002/sej.1156
• Author: Curt B. Moore,R. Greg Bell,Miles A. Zachary,G. Tyge Payne
• Date: 01 September 2013
• Published date: 01 September 2013

SIGNALING ORGANIZATIONAL VIRTUE:

AN EXAMINATION OF VIRTUE RHETORIC,

COUNTRY-LEVEL CORRUPTION, AND

PERFORMANCE OF FOREIGN IPOs FROM

EMERGING AND DEVELOPED ECONOMIES

G. TYGE PAYNE,1CURT B. MOORE,1* R. GREG BELL,2and

MILES A. ZACHARY1

1Area of Management, Rawls College of Business, Texas Tech University,

Lubbock, Texas, U.S.A.

2Graduate School of Management, University of Dallas, Irving, Texas, U.S.A.

Extending signaling theory by discussing rhetoric in terms of cost and observability, we

examine the relationship between organizational virtue rhetoric in prospectuses and the per-

formance of foreign IPOs from 35 different countries. We also explore how the nature of this

relationship is contingent upon the level of perceived corruption for each IPO firm’s home

country, a pervasive and costly problem for emerging economy countries due to its impact on

economic growth and national governance. Our results indicate that signaling organizational

virtue in prospectuses leads to higher levels of foreign IPO performance, which is positively

moderated by perceived home country corruption. Copyright © 2013 Strategic Management

Society.

INTRODUCTION

A key area of research in the strategic entrepreneur-

ship and international management literature in how

firms from emerging economies enter developed

economies (Wright, Pruthi, and Lockett, 2005).

Within this research stream, there is a growing inter-

est in understanding how and why firms increasingly

seek investor capital through initial public offerings

(IPOs) on foreign exchanges (Bell, Moore, and

Al-Shammari, 2008). Such firms are termed foreign

IPOs and defined as private firms that choose to

forgo their home country stock exchanges in favor of

listing on stock exchanges outside their own country

(Bell, Moore, and Filatotchev, 2012b; Ding, Nowak,

and Zhang, 2010). The growth in foreign IPOs is

largely the result of increased financial market inte-

gration wherein it has become easier for firms from

smaller, less developed countries to access lucrative

developed markets (Yoshikawa et al., 2006).

While many of the barriers to entry have been

reduced for foreign firms through financial market

integration, significant challenges remain, particu-

larly for firms from emerging economy countries.

Many of the problems facing such firms are derived

from the limited information available to investorsin

developed markets (Yiu, Bruton, and Lu, 2005).

Limited information, then, often leads to biases and

stigmatizations, justifiable or not, by investors. In

other words, in the absence of reliable information,

perceptions regarding the economic and institutional

context from which a firm originates will be con-

ferred to the firm itself. Specific to the current study,

investment behavior can be partially explained by

national culture differences in moral philosophies

Keywords: corruption; emerging economies; ethics; foreign

IPOs; organizational virtue; signaling theory; underpricing

*Correspondence to: Curt B. Moore, Area of Management,

Rawls College of Business, Texas Tech University, MS 2101,

Lubbock, TX 79409, U.S.A. E-mail: curt.moore@ttu.edu

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 7: 230–251 (2013)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1156

Copyright © 2013 Strategic Management Society

and, consequently, ethical standards and principles

(e.g., Christie et al., 2003; Ralston et al., 1997).

Firms attempting an IPO in a foreign market, par-

ticularly those from countries viewed as being more

corrupt (e.g., emerging economies), face consider-

able ex ante negative investor sentiment.

Building on signaling theory, this study examines

whether firms attempt to signal virtuous or ethical

characteristics to investors in foreign capital markets

and to what extent those signals improve IPO per-

formance. Over the last decade, signaling theory has

been increasingly utilized in the strategic manage-

ment and entrepreneurship literatures to describe and

better understand how information—typically posi-

tive information about individuals, products, or

organizations—is communicated between two

parties (Connelly et al., 2011). Specifically for IPOs,

signaling is important because, without proven com-

petencies or a reliable history of performance, it is

generally difficult for entrepreneurs to overcome the

information asymmetries that prevent investors from

committing capital to a venture (Amit, Brander, and

Zott, 1998).

Despite extensive inquiry on the effects of various

signals on IPO performance, research has yet to

address whether or not signals regarding the ethics or

organizational virtue of a firm are considered by

investors when they make initial investment deci-

sions. Rather, previous discussions tying IPO firms

to ethics have been largely limited to agency con-

cerns surrounding the conflicts of interest leading up

to the IPO offer itself (e.g., Dalton, Certo, and Daily,

2003). While business ethics has been of interest to

researchers for decades, the question of what role, if

any, signals of organizational virtue play in deter-

mining the value of ventures has yet to be addressed.

This key unanswered question represent a significant

gap in both the signaling theory and strategic entre-

preneurship literatures insofar as previous research

has not explained the counteractive effect of virtuous

signals in the presence of preconceived investor

perceptions.

This study bridges this gap by considering how

signaling organizational virtue can help overcome

negative investor perceptions.While higher levels of

organizational virtue would presumably be more

attractive to potential investors in general, the nature

of this relationship, as well as the applicability of

signaling theory, is really made explicit only if we

also consider the basis upon which a potential inves-

tor might initially evaluate an IPO firm in terms of

ethics and virtue. In other words, it is important to

examine ‘the heterogeneous aspects of context’ and

factor them into ‘theory building and testing efforts’

(Zahra and Wright, 2011: 67). Therefore, in order to

gain richer and more accurate insights into the phe-

nomenon and theory (Zahra, 2007), we contextualize

our study by comparatively examining foreign IPO

firms that originate from a variety of nations, includ-

ing firms from emerging economies. We argue that

while signaling may be generally important for IPO

firms, signals are more important for firms seeking

equity capital in foreign markets, particularly when

they address intangible characteristics of the firm

and originate for less well-known nations (Dvorak,

2005; Yamakawa, Peng, and Deeds, 2008).

Considering the complex relationship between

organizational virtue and IPO performance within a

diverse international context, this study makes three

contributions to the literature. First and most gener-

ally, this study addresses the previously overlooked

topics of business ethics and organizational virtue in

strategic entrepreneurship research. Building on sig-

naling theory, we suggest that organizational virtue

language—along the six dimensions of integrity,

empathy, warmth, courage, conscientiousness, and

zeal—will signal quality to investors such that

uncertainty regarding investing will be reduced. This

study, therefore, follows recent strategic entrepre-

neurship research evaluating the role of language in

the acquisition of external resources (Martens,

Jennings, and Jennings, 2007; Lounsbury and

Glynn, 2001). Further, this study extends theory on

signaling by discussing rhetoric as a form of signal

in terms of cost and observability. Specifically, we

consider how costs may be incurred prior to or after

making a signal and how information may be strate-

gically managed using rhetoric and language.

As a second contribution, this study advances

theory specifically related to emerging economies by

demonstrating how signaling can be utilized by

foreign firms to overcome information asymmetries.

Foreign IPO firms face legitimacy concerns and

greater information asymmetries than domestic IPOs

(Francis et al., 2010). Further, the extent of informa-

tion asymmetries is even greater for firms from

emerging markets (Bell et al., 2012b; Eden and

Miller, 2004), which can lead to stigmatization and

potential liabilities, such as liabilities of foreignness

(Bell, Filatotchev, and Rasheed, 2012a; Connelly

et al., 2011). Based on our findings, we demonstrate

that signaling theory, as associated with information

asymmetries, has much potential to advance theory

and knowledge on emerging economies. In fact,

Signaling Organizational Virtue 231

Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J.,7: 230–251 (2013)

DOI: 10.1002/sej