Inventor CEOs and financing of innovation: Evidence from IPOs

Abstract

We examine the role of inventor CEOs—those with personal hands-on experience of innovation—in the financing of innovation. Using a sample of technology initial public offerings (IPOs) in the US, we document that inventor CEOs are associated with lower underpricing at the time of the IPOs. Inventor CEOs also appear more capable of taking their firms public during “cold” IPO market periods when financing conditions are more difficult. Analyses based on regulatory changes and a founder-only sample suggest that these relationships are causal. Further, inventor-led firms appear to invest the IPO proceeds more productively, as reflected in the firms’ superior innovation outcomes in the post-IPO period. The stock market fails to fully understand these relationships, and IPOs led by inventor CEOs produce large positive abnormal returns in the three years following the offering. Our findings are consistent with inventor CEOs facilitating innovation financing for startup firms by effectively reducing information asymmetry and valuation uncertainty of firm's innovation capital for outside investors.