CEO education and the ability to raise capital

• DOI: http://doi.org/10.1111/corg.12338
• Date: 01 January 2021
• Published date: 01 January 2021

ORIGINAL ARTICLE

CEO education and the ability to raise capital

Dimitrios Gounopoulos

1

| Georgios Loukopoulos

2

| Panagiotis Loukopoulos

3

1

School of Management, University of Bath,

Bath, UK

2

Open University Business School, Open

University, Milton Keynes, UK

3

Strathclyde Business School, University of

Strathclyde, Glasgow, UK

Correspondence

Dimitrios Gounopoulos, School of

Management, University of Bath, Bath, UK.

Email: d.gounopoulos@bath.ac.uk

Abstract

Research Question/Issue: Using a unique hand-collected dataset, this study

examines the role of chief executive officer (CEO) educational attainments in relation

to newly public firms.

Theoretical/Academic Implications: Using human capital, institutional and upper

echelon theories, we hypothesize and demonstrate that CEO educational

attainments do not unambiguously affect investors' perceptions of a firm's future

prospects. Instead, their influence depends on the quality of CEO education as well

as on the degree of uncertainty regarding the firm's future performance and the level

of information asymmetry between issuers and prospective investors. To our

knowledge, this is the first study that provides a comprehensive treatment of the role

of CEO education in the IPO context.

Research Findings/Insights: We find that initial public offering (IPO) firms led by

CEOs with superior educational credentials—in terms of level and quality—are

associated with lower levels of IPO underpricing. This association is mainly driven by

CEOs that hold advanced degrees. Notably, a difference-in-differences approach

based on two quasi-natural experiments indicates that the impact of CEO education

on IPO underpricing is more pronounced within environments characterized by lower

information transparency. The baseline results also hold in the longer term, thereby

confirming the value of signaling prestigious academic awards at the time of the IPO.

Practitioner/Policy Implications: Our evidence on the importance of CEO education,

and especially that CEOs with varying levels and quality of educational training might

differentially affect newly listed firms, is useful to providers of financial capital and

boards of directors interested in assessing the viability of new ventures. The

implication of our study for IPO investors is that it is worth paying more to take an

equity position in firms run by better educated CEOs.

KEYWORDS

corporate governance, CEO education, initial public offerings, post-IPO performance, signaling

Received: 6 October 2019 Revised: 6 August 2020 Accepted: 10 August 2020

DOI: 10.1111/corg.12338

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reprodu ction in any medium,

provided the original work is properly cited.

© 2020 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd

Corp Govern Int Rev. 2021;29:67–99. wileyonlinelibrary.com/journal/corg 67

1|INTRODUCTION

Does it pay to invest in higher education? Numerous studies have

extensively examined the effect of education on a variety of organiza-

tional outcomes such as innovation and strategic change (Barker &

Mueller, 2002), mergers and acquisitions (Wang & Yin, 2018), and

financial performance (Bennedsen, Perez-Gonzalez, &

Wolfenzon, 2020; Chevalier & Ellison, 1999; King, Srivastav, &

Williams, 2016; Li, Zhang, & Zhao, 2011; Miller, Xu, &

Mehrotta, 2015). Yet only a few studies have explicitly focused on

young, fast-growing, entrepreneurial organizations (Chemmanur &

Paeglis, 2005; Cohen & Dean, 2005; Colombo, Meoli, &

Vismara, 2019; Higgins & Gulati, 2006), and none in this context have

examined in detail the role of the education of the chief executive

officer (CEO), despite its potential significance in shaping corporate

vision and organizational policies.

In this study, we explore the role of CEO academic achievements

on the most notable entrepreneurial setting, namely, initial public

offerings (IPOs). The IPO market represents a vital asset for the

aggregate economy, given its role in facilitating entrepreneurship,

job creation, and sustainable growth (Butler, Fauver, &

Spyridopoulos, 2019; Doidge, Karolyi, & Stulz, 2013; Fama &

French, 2004). In addition, the IPO constitutes a major development

in the evolution of an entrepreneurial firm's life, because it provides

substantial financial resources to support navigation of the transition

from the private domain to the public arena (Certo, 2003).

However, investing in IPOs can be an especially risky proposi-

tion (Field & Lowry, 2009). Rather than mature firms, IPOs typically

involve young companies, many with short operating histories

and/or negative earnings when they go public (Cohen &

Dean, 2005; Higgins & Gulati, 2006). Therefore, they are especially

vulnerable to market speculation about their long-term prospects

and their capacity to operate in the public domain (Cohen &

Dean, 2005; Higgins & Gulati, 2006). In this turbulent environment,

the major challenge for IPO issuers is to persuade external parties

that their company represents a rational economic investment

(Cohen & Dean, 2005).

How might CEO education influence IPO success? The extant

literature demonstrates that CEO education provides access to scarce

resources in at least three nonexclusive ways: (1) advanced degrees

from stellar institutions can be an indicator of a CEO's unobservable

talent, intellect, and capability to persevere in a challenging

environment, because such institutions are very selective and have

stringent entry requirements (Certo, 2003; Miller et al., 2015; Wally &

Baum, 1994); (2) higher or better quality educational training can

potentially enhance an individual's knowledge, skills, perspective, and

ability to understand technical and abstract concepts (Bai, Tsang, &

Xia, 2018)

1

; (3) higher education, especially from reputable

institutions, might also be an indicator of a greater depth and quality

of social networks acquired in college and graduate school (Colombo

et al., 2019; Datta & Iskandar-Datta, 2014).

In light of the above, it can be argued that prestigious educational

credentials (i.e., higher degrees from selective universities) provide

access to scarce human and social capital (Barney, 1991;

D'Aveni, 1990). Building on this resource-based perspective, we argue

that CEO education might enhance a firm's performance by playing a

substantive role and, possibly, a signaling role.

In terms of the substantive role, previous studies posit that CEOs

that hold advanced degrees from selective institutions can convey the

intrinsic value of their firm more credibly to outsiders (Chemmanur &

Paeglis, 2005; Chemmanur, Paeglis, & Simonyan, 2010). This

certification effect may occur because CEOs with prestigious educa-

tional credentials have greater inherent communication abilities or

better access to networks of financial intermediaries, both of which

lower information acquisition costs for outsiders. It may also occur

because such managers are more likely to price their equity fairly

because they have significant reputations at stake. Likewise, better

educated managers should be able to select better projects and

implement them more ably, which, in turn, leads to a larger scale of

investment at equilibrium and better operating performance (Amore,

Bennedsen, Larsen, & Rosenbaum, 2019; Chemmanur, Kong,

Krishnan, & Xu, 2019). As for the signaling role, several scholars argue

that, in addition to the concrete resources that well-educated

individuals may provide to a firm, their (educational) background

fulfills a signaling function that can influence investors' perceptions of

the firm's prospects in several ways (e.g., Cohen & Dean, 2005;

Colombo et al., 2019; Lester, Certo, Dalton, Dalton, & Cannella, 2006;

Zimmerman, 2008). For instance, it is possible that investment

bankers, as well as informed and uninformed investors, consider CEO

educational credentials when deciding which equity issues to

underwrite and financially support, respectively (Chemmanur &

Paeglis, 2005; Colombo et al., 2019).

Collectively, we anticipate that CEO education affects newly

listed firms either through substantive actions or by performing a

signaling role; yet these functions have similar implications for IPO

underpricing because both help to reduce uncertainty and information

asymmetry in a firm's external environment. Therefore, if academic

achievements enhance recognition and visibility of the IPO firm in the

eyes of potential investors, then firms with better educated CEOs

need to exert less effort to stimulate or maintain investor demand for

their shares. In this regard, such firms would be subject to lower

pressure to discount their IPO subscription price, which, in turn,

translates to less money being “left on the table.”

Nevertheless, we do not expect that all forms of education will be

equally valuable to a firm's performance and, hence, to the eyes of

potential investors. Instead, we predict that the benefits stemming

from CEO education will be more pronounced among individuals with

advanced degrees and/or degrees from elite institutions because, in

these cases, CEOs are more likely to be associated with superior levels

of knowledge, skills, cognitive complexity, training, intellectual

capacity, and access to social networks (e.g., Miller et al., 2015;

Zimmerman, 2008). Perhaps, most importantly, we anticipate that the

uncertainty-reducing and value-enhancing benefits of CEO education

around IPOs will be strongest in environments characterized by low

transparency, that is, among firms that are more likely to suffer from

uncertainty and information asymmetry between insiders and

68 GOUNOPOULOS ET AL.

outsiders in the equity market (Chemmanur et al., 2010; Colombo

et al., 2019; Stuart, Hoang, & Hybels, 1999).

To explore the above hypotheses, we carefully construct a unique

hand-collected dataset that captures CEO educational qualifications

in relation to 1,601 US IPOs during the period 2000–2016. We

categorize each academic qualification according to the level of

training, namely, whether it is at undergraduate (BSc or BA), master's

(MSc, MA, or MBA), or doctoral (PhD, JD, or MD) level, and identify

the awarding institution in the US News & World Report 2017 rank-

ings (USNWR) in order to determine whether it was obtained from a

prestigious (i.e., Top 20) school (Bhagat, Bolton, & Subramanian, 2010;

King et al., 2016).

2

To determine whether CEO educational attainments matter in

IPOs, we exploit the properties of our dataset and develop a CEO

education index comprising three factors: undergraduate education

(constituting a basic undergraduate level of training that aids the

development of transferable skills), master's education (representing

the level of technical or management training and knowledge acquired

through more specialized degrees), and doctoral education (indicating

a level of technical expertise obtained through an advanced degree or

doctorate). Factor analysis is particularly suitable because it can

mitigate issues arising from subjective research judgments such as the

relative importance of each educational dimension (i.e., level and

quality) and other measurement issues (Custodio, Ferreira, &

Matos, 2013; King et al., 2016; Tetlock, 2007).

We examine whether CEO educational awards enhance the

ability of a firm to raise capital effectively by focusing on the market's

initial response to the company's stock offering, measured as the

change in the stock price during its first day of trading. This

difference, known as “underpricing,”is a widely used metric of IPO

success: a low value indicates that the firm was able to raise more

capital through its IPO in relative terms (Certo, Daily, & Dalton, 2001;

Higgins & Gulati, 2006).

In line with our hypotheses, we find that our three CEO education

factors are negatively associated with IPO underpricing. Interestingly,

this link is strongest for advanced degrees. To get a feeling of the

economic magnitude involved, a one-standard-deviation increase in

the doctoral factor is associated with a 1.56% decrease in IPO

underpricing. Most notably, by resorting to a difference-in-differences

approach, we exploit two “natural”experiments—the introductions of

the Sarbanes–Oxley (2002) and JOBS (2012) Acts—that exogenously

affected firms' information environments and show that the impact

of CEO education on IPO underpricing is strongest among firms

suffering from the greatest information asymmetry problems.

An important issue in relation to our sample is the need to control

for endogenous firm–CEO matching, whereby we acknowledge that

the assignment of a particular CEO to a particular firm is not random.

This recognition is motivated by the assortative matching literature,

which describes a two-sided matching process in which managers and

firms select one another, leading to strong relationships between the

characteristics of a firm and those of its CEO (e.g., Gabaix &

Landier, 2008). Such forms of matching may involve, for example,

more talented CEOs being sorted competitively into firms with better

prospects (Tervio, 2008), or executives with stronger educational

credentials commanding greater value in the labor market, thereby

being in a better position to self-select into the most viable IPO firms

(Rivera, 2012). Alternatively, a firm–CEO match may be determined in

part by the risk preferences of the firm and/or the CEO

(Blankerspoor, Hendricks, & Miller, 2017).

Our econometric framework accounts for endogenous firm–CEO

matching by adopting an instrumental variable (IV) analysis method, in

which the first stage predicts the probability of a firm being able to

hire a manager with a given educational background. Specifically, we

follow Chemmanur et al. (2019) and instrument for CEO quality

(as measured by our three education factors) using a plausible exoge-

nous shock to the supply of top executives available for hire by a firm,

namely, the number of acquisitions in the industry and the (U.S.) state

of the sample firm in the 5 years before, weighted by an index

measuring the enforceability of noncompete clauses in that state.

Our second-stage results show that our baseline inferences

remain unchanged.

Last, our results also hold in the post-IPO period. Our analysis of

long-run investment and operating performance reveals that the

companies of CEOs with prestigious educational degrees outperform

those of CEOs without such degrees. These results are important

because they confirm the signaling value of CEO education. This

finding is supportive of a separating equilibrium, given that a neces-

sary equilibrium condition is satisfied, in which investors are willing to

pay extra for firms run by well-educated CEOs at the time of the IPO,

because these firms outperform others in the long run.

This study contributes to the literature in various ways. Prior

studies on the link between CEO education and organizational

outcomes have mostly explored the potential substantive benefits for

large, established firms (e.g., Barker & Mueller, 2002; Beber &

Fabbri, 2012; Bhagat et al., 2010; Chevalier & Ellison, 1999;

Fedaseyeu, Linck, & Wagner, 2018; Gottesman & Morey, 2006; Hitt,

Bierman, & Shimizu, 2001; King et al., 2016; Wang & Yin, 2018). By

focusing on newly listed firms, we demonstrate that the benefits of

CEO educational achievements extend to the IPO context, because

these awards seem to materially affect a firm's ability to raise capital

in the primary equity market. Moreover, we suggest that, in addition

to providing concrete resources, prestigious CEO educational

credentials may serve a vital signaling function, because our findings

indicate that it is worth paying more to take an equity position in the

IPO of firms run by well-educated CEOs. Thus, we extend and

complement the extant literature by providing a more complete

picture of the role of CEO education in corporations.

Our study is also closely related to the IPO underpricing

literature,where priorresearch haslargely focusedon disclosuresrelated

to firm-specific characteristics, outside parties, and/or human capital

(Carter & Manaster, 1990; Certo, 2003; Megginson & Weiss, 1991). In

thisrespect, our work is closely related to a series of studies that examine

the relationship between the quality of a firm's top management team

and various aspects of its IPO performance (e.g., Chemmanur &

Paeglis, 2005; Zimmerman, 2008). While these studies indicate that IPO

investors appear to reward firms with well-educated managers, they

GOUNOPOULOS ET AL.69