This study examines how quality signals sent by technology ventures jointly affect investors’ decisions under information asymmetry. We categorize signal contents as concerning technology development, venture officers, or early investors. Because similar information may not much reduce information asymmetry, different signals of the same content substitute for one another in enabling ventures to raise capital in their initial public offerings (IPOs). In contrast, signals of different contents collectively reduce information asymmetry, and thus complement each other. Furthermore, public investors may be more capable of assessing, and therefore give more weight to, signals based on the abilities and commitment of venture officers and early investors than to signals based on the viability and appropriability of technology development. We employ fuzzy set qualitative comparative analysis (fsQCA) and find evidence for these mechanisms from data on 268 IPOs of biotechnology ventures in the United States.

Introduction

Technology ventures often need to raise large amounts of capital before they can generate stable revenue and income from their products or services. Researchers have widely documented that initial public offering (IPO) is a major financing conduit (Brau & Fawcett, 2006; Ritter & Welch, 2002), but information asymmetry between technology ventures and investors in IPO markets is high. Ventures’ advanced and specialized knowledge and technologies are difficult for external stakeholders to understand (Aldrich & Fiol, 1994), and without credible operating records they often lack legitimacy in the eyes of investors (Fisher, Kotha, & Lahiri, 2016). Signaling theory helps explain how market participants make decisions under information asymmetry (Spence, 1973, 2002). In the IPO context, researchers have examined the signaling effects of intellectual capital (Mousa & Reed, 2013; Singh & Van der Zahn, 2009; Useche, 2014), product development (Deeds, Decarolis, & Coombs, 1997; Guo, Lev, & Zhou, 2005), board directors (Certo, Daily, & Dalton, 2001; Pollock, Chen, Jackson, & Hambrick, 2010), executive officers (Cohen & Dean, 2005), founders’ roles and status (Gao & Jain, 2011; Wang & Song, 2016; Williams, Duncan, & Ginter, 2010), and other venture characteristics specified in media and in IPO prospectuses (Gao, Darroch, Mather, & MacGregor, 2008; Mousa, Wales, & Harper, 2015; Pollock & Rindova, 2003).