S. Trevis Certo

Signaling Theory: A Review and Assessment

Signaling theory is useful for describing behavior when two parties (individuals or organizations) have access to different information. Typically, one party, the sender, must choose whether and how to communicate (or signal) that information, and the other party, the receiver, must choose how to interpret the signal. Accordingly, signaling theory holds a prominent position in a variety of management literatures, including strategic management, entrepreneurship, and human resource management. While the use of signaling theory has gained momentum in recent years, its central tenets have become blurred as it has been applied to organizational concerns. The authors, therefore, provide a concise synthesis of the theory and its key concepts, review its use in the management literature, and put forward directions for future research that will encourage scholars to use signaling theory in new ways and to develop more complex formulations and nuanced variations of the theory.

1 The Fundamental Agency Problem and Its Mitigation: Independence, Equity, and the Market for Corporate Control

A central tenet of agency theory is that there is potential for mischief when the interests of owners and managers diverge. In those circumstances, and for a variety of reasons, managers may be able to exact higher rents than are reasonable or than the owners of the firm would otherwise accord them. While that foundational element of agency theory is secure, other elements derived directly from agency theory are far less settled. Indeed, even after some 75 years of conceptualization and empirical research, the three principal approaches that have long been proposed to mitigate the fundamental agency problem remain contentious. Accordingly, we provide a review of the fundamental agency problem and its mitigation through independence, equity, and the market for corporate control.

Signaling Firm Value through Board Structure: An Investigation of Initial Public Offerings

The relationship between boards of directors and firm performance, whether in the entrepreneurial context or otherwise, has long intrigued scholars. To date, no systematic relationship has been established, leading researchers to explore specialized contexts where such relationships may emerge. We believe the initial public offering (IPO) process provides a promising context. Relying on signaling theory, we investigate the relationship between board structure and IPO underpricing, a performance indicator unique to the IPO context, among a sample of IPOs during the 1990s. Consistent with signaling theory, board size and board reputation are negatively associated with IPO underpricing, but board composition and board leadership structure are not negatively associated with IPO underpricing.

Top Management Teams, Strategy and Financial Performance: A Meta-Analytic Examination

A considerable amount of research has investigated the linkage between top management team (TMT) characteristics and firm financial performance. Much of this research relies on demographic data. While these data are reliable and accessible, findings across studies are not consistent. Meta-analysis of several TMT indicators and firm financial performance provides modest support for direct relationships but indicates moderating influences. Further meta-analysis and a confirmatory factor analysis enrich these findings by examining potential moderating and intervening factors.

Ownership as a Form of Corporate Governance

Firm ownership is an increasingly influential form of corporate governance. Although firms might be owned by different types of owners, most studies examine owner influence on a particular firm outcome in isolation. This study synthesizes research from multiple disciplines on different types of owners and offers a unifying framework of governance through ownership. Using this framework, we describe the motivations of various types of owners, the tactics owners use to affect firms in which they are invested, and the dominant firm outcomes these owners seek to influence. We note how heightened managerial awareness of heterogeneous owner interests increases owner influence on firm-level outcomes. We also provide a roadmap for future study and offer research questions about where scholars might turn their attention to better understand the role of owners in directing firm actions. Our study draws attention to emerging forms of ownership, such as hedge funds and sovereign wealth funds, and highlights the changing (and often competing) interests of shareholders and how this impacts theories of governance.

IPO Underpricing: A Meta‐Analysis and Research Synthesis

Initial public offerings (IPOs) have been a prominent focus of academic and popular press attention, especially in recent years. Much of this attention can be attributed to the increase in IPO activity as a function of the “dot com” phenomenon. Of particular interest to both academics and practitioners is IPO underpricing. Review of existing research suggests little consensus regarding those factors associated with underpricing. We provide a meta–analysis of published studies. Our findings reveal a number of significant relationships, many of which are opposite that predicted by signaling theory. Implications of these findings for practice and future research are discussed.

Initial public offering investor valuations: An examination of top management team prestige and environmental uncertainty

Relying on one of the more notable entrepreneurial settings, an initial public offering (IPO), this article extends prior work on top management team (TMT) characteristics. We examine whether or not prestigious TMTs at the time of an IPO enhance organizational legitimacy and thereby provide a signal to potential investors. Because an IPO represents an entrepreneurial context characterized by high levels of uncertainty, we also consider the impact of environmental uncertainty on the TMT prestige/investor valuation relationship. We find that both an element of TMT prestige and environmental uncertainty influence investor valuations. However, we also find that the influence of prestige does not assuage investors when analyzing IPOs in different environmental conditions.

Strategy Research and Panel Data: Evidence and Implications

A number of studies in strategic management rely on panel (longitudinal) data to test theory. The advantages of panel data notwithstanding, such data introduce analytic problems (e.g., autocorrelation, heteroskedasticity, contemporaneous correlation) that make traditional estimators (e.g., ordinary least squares) inappropriate. This study highlights the influence of contemporaneous correlation, a statistical problem that affects the analysis of panel data. Using Monte Carlo simulations, the authors find that contemporaneous correlation is particularly problematic when analyzing data sets typically used in strategic management research. They suggest straightforward techniques to mitigate the harmful effects of contemporaneous correlation.

IPO Research in Management and Entrepreneurship: Moving the Agenda Forward

Building on research from multiple fields, management and entrepreneurship scholars have shown increasing interest in the causes and consequences of initial public offerings (IPOs). The authors summarize this emerging literature and categorize research on IPOs into four broad themes: corporate governance, upper echelons, social influence, and innovation. They also review the various measures used by scholars to assess IPO performance. Based on this review, the authors develop an agenda for future research. This agenda provides both topics and research questions for future research and recommendations regarding IPO performance measurement.

Executive Stock Option Repricing: Retention and Performance Reconsidered

The repricing of stock options—resetting option values when the strike price falls below the current trading price of a firm9s stock—is a controversial tactic. Detractors suggest that repricing is tantamount to rewarding the failure of firms9 management to secure a level of stock value that exceeds the strike price of options. The arguments of proponents, however, reflect a common theme—a sentiment routinely expressed in repricing firms9 proxy materials: Repricing facilitates the retention of chief executive officers and top management teams and, derivatively, the financial performance of the firm. An analysis of these diametrically opposed views provides no support for the perspective that repricing facilitates either retention or firm financial performance. In fact, repricing is associated with increased levels of CEO and TMT turnover. Moreover, there is no evidence that repricing is associated with improvement in the financial performance of the firm.