Crossed wires: Endorsement signals and the effects of IPO firm delistings on venture capitalists’ reputations

• Main Authors: GOMULYA, David, JIN, Kyuho, LEE, Peggy M., POLLOCK, Timothy G.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Corporate Finance; Organizational Behavior and Theory; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5976; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6975/viewcontent/crossedwires.pdf
• Institution: Singapore Management University

Signaling theorists have paid a great deal of attention to the costs of acquiring characteristics that can serve as signals, such as endorsements from reputable third parties. However limited attention has been devoted to the penalty costs associated with providing inaccurate signals and the factors that can exacerbate or attenuate the penalties. In this study, we examine the effect of negative feedback loops on venture capital firms’ reputations that result from the failures (delistings) of the newly-public firms they once endorsed. Drawing on signaling and attribution theories, we argue that endorsements by reputable VC firms create high expectations that, when violated, cause stakeholders to look for scapegoats, resulting in reputational damage to the endorsing VCs. We find empirical support for this argument, and for the attenuating effect of post-IPO market performance and the time since IPO. Our study contributes to the conversation about endorsements as signals, and empirically tests the implicit assumption that endorsements place the reputation of the endorser at risk.