Signaling Type and Post‐ IPO Performance

Abstract

Management research has examined how signaling at the time of an initial public offering ( IPO ) certifies firm quality and helps address the adverse selection problem for uninformed investors. We add to this literature by proposing a typology of signals based on whether the signal involves upfront cash investments (default‐independent) or whether it is meant to be a credible non‐cash commitment to suffer negative consequences should the firm underperform (default‐contingent). We also argue that this definitional distinction highlights differences in the underlying characteristics of these signal types in terms of cost, certifiability, clarity, consistency, commitment, and visibility. Using underwriter reputation and patents as proxies for default‐independent signals, and director ownership and founder status as proxies for default‐contingent signals, we find that only default‐independent signals improve post‐ IPO firm performance.

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