by Lyda S. Bigelow
Facebook’s recent IPO garnered enormous publicity--quickly followed by controversy. That high-profile initial public offering (IPO) has also drawn attention to just how this going-public process works--especially the institutional investors’ evaluation of the firm prior to the IPO event itself.
In the wake of Facebook’s IPO, we have evidence that both Facebook's investment banks and top managers misjudged the market price and overestimated demand for the new stock. I’ve done research that suggests these kinds of biased estimates may happen in other IPOs as well. But the specific cognitive bias I investigate is potential gender bias. Here’s why. While the IPO is one of the most common mechanisms for acquiring needed financial resources, it is surprising that women-led IPOs are an extremely rare phenomenon. And the dearth of women-led IPOs cannot be attributed to a lack of women-led firms. In the United States, women-owned or women-led firms represent nearly 50% of all privately held businesses and are founded in the same business sectors and in the same ratios as those founded by men. While women have increased their presence in IPO firms at the officer level, from less than 10 percent in 1997, to more than 55 percent in 2007, the relative absence of female-led IPOs remains a curiosity. One possible explanation for this phenomenon hints at a potentially larger problem: a gender-based capital gap for new ventures. If companies led by women are disadvantaged in their ability to raise cash through public markets, their viability and financial health, as well as their ability to expand and compete in an increasingly global and competitive environment, are threatened. Surprisingly, after repeated calls for scholarly inquiry into the role that gender might play in the financing of new ventures; few studies exist on the topic.
My research tested directly how investor perceptions--measured when the investor encounters and processes the information in an investment prospectus--have a significant impact on the investor’s evaluation of the IPO.
For this experiment, we constructed a prospectus then asked subjects to provide estimates of the riskiness of the firm, expected share price appreciation and their willingness to invest in the firm’s IPO. We also asked them to evaluate the strategic positioning of the firm as well as to assess the competence and capability of the firm’s CEO. Our subjects were 2nd year MBA students selected from a top-tier business school. Each was randomly assigned to a prospectus in which the only material difference was the gender of the top management team, including the CEO. An experiment has the advantage in that it enables us to hold all other aspects of the IPO constant while varying just the gender composition of the management team and CEO. We went to great lengths to make the prospectus appear as genuine as possible; in fact, the material was based on an actual (successful) IPO.
Our results suggest that female CEOs may be disproportionately disadvantaged in their ability to attract growth capital when all other factors are controlled. Despite identical personal qualifications and firm financials, female Founder/CEOs were perceived as less capable than their male counterparts, and IPOs led by female Founder/CEOs were considered less attractive investments. Respondents estimated lower share price appreciation, assigned a higher level of risk to the IPO and were less willing to invest.
This evidence of systematic bias in IPO prospectus evaluations helps explain the paucity of women-led IPOs, and raises important questions surrounding IPOs themselves (e.g. mispricing and performance as evidenced by Facebook).
The IPO represents an important milestone for an entrepreneurial firm. It provides critical resources for a company’s future expansion, and often provides the founder and initial investor with the first substantive financial rewards from their investment of time and resources building the entrepreneurial venture. High-growth firms depend on access to capital and resources afforded by the IPO to realize their ambitions. Our results suggest that female founders may be disadvantaged early in this process during the evaluation of the IPO by professional investors, long before the entrepreneurial firm becomes a public company. Despite identical personal qualifications and firm financials, firms led by female CEOs may be hamstrung in terms of their ability to take a company public.
The disparity is significant, as is its potential economic and social impact. Perhaps it is not surprising that female entrepreneurs are more likely than male entrepreneurs to use informal forms of financing, such as credit cards. But financing a business enterprise on a credit card will further disadvantage the female entrepreneur. As noted by Terry Cavenaugh (2001), director of the Women’s Entrepreneur Connection at Fleet Boston, “This reliance on personal debt is holding women business owners back.” And this disadvantage extends beyond the women business owners themselves. Given the fact that women-owned businesses represent almost half of the entrepreneurial activity in the United States, anything that impacts the economics of these companies is of concern. The economic impact of women-owned firms is significant: they employ almost 20 million people with payrolls over $500 billion, and generate annual sales of $2.5 trillion (Center for Women’s Business Research, 2004). The potential economic impact of the “green ceiling” is substantial.
If women-led companies can’t raise cash through the stock market, that can impact the viability and financial health of their companies, their ability to expand and compete in an increasingly global and competitive environment, and if they are unable to remain viable, their employees’ livelihoods.
It’s another ceiling that needs crashing.
Lyda Bigelow is the David Eccles Emerging Scholar and Assistant Professor of Strategy at the University of Utah's School of Business. Before becoming a professor, she had a career in investment banking in corporate finance. Bigelow has an MBA from Wharton and a Ph.D. from the University of California, Berkeley. Her work has appeared in the Strategic Management Journal, Journal of Economic Behavior and Organization and Management Science. She is a member of the Editorial Board of the Strategic Management Journal and is a reviewer for Administrative Science Quarterly, Organization Science.
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