Science-based legitimacy: the value relevance of interacting signals for young firms

This paper contributes to the literature on the legitimization of science-based firms, by investigating whether the affiliation by with prestigious universities affect their valuation at IPO, and how it interacts of the endorsements by prestigious underwriters and venture capitalists. Based on a sample of 254 European biotech firms, we find that scientific legitimization is valued by investors, and this is particularly true when the company is tied to a prestigious academic entity. We confirm previous results on the relevance of the certification provided by top-tier underwriters and venture capitalists. However, taking into considerations their interactions, we find that signal provided by venture capitalists shades, as it is moderated by its overlapping with the endorsements by reputable underwriters and universities. We argue that underwriters provide the strongest certification role due to positive selection, while universities bring the strongest certification of substantive business benefits. Venture capitalists mix these two roles.