Nonmarket Signals: Investment in Corporate Political Activity and the Performance of Initial Public Offerings

Author(s)

Bruce C. Rudy, University of Texas at San AntonioFollow
Jason Cavich, Nova Southeastern UniversityFollow

ORCID

Jason Cavich0000-0003-1635-0307

Document Type

Article

Publication Title

Business & Society

ISSN

0007-6503

Publication Date

2017

Abstract/Excerpt

Research on firm initial public offering (IPO) performance has primarily utilized an economics of information perspective, which assumes that publicly available information is incorporated into a stock’s price when it is issued. However, the valuation process associated with IPOs remains manifest with considerable uncertainty for the prospective investor. This study argues that corporate political activity undertaken prior to the firm’s IPO acts as a signal to investors, reducing the uncertainty the market places on the value of the firm’s equity. Utilizing a sample of 180 IPOs, we show that the more a firm invests in corporate political activity prior to its IPO, the better its IPO performance. These findings provide evidence that corporate political activity acts as a nonmarket signal, influencing investor behavior by reducing the information asymmetries between investors and the target firm.

DOI

https://doi.org/10.1177/0007650317717263

NSUWorks Citation

Rudy, Bruce C. and Cavich, Jason, "Nonmarket Signals: Investment in Corporate Political Activity and the Performance of Initial Public Offerings" (2017). HCBE Faculty Articles. 1145.
https://nsuworks.nova.edu/hcbe_facarticles/1145