The research of intangible resources has generally focused either on the perceived value of intangible resources by company CEOs (Hall, 1992; 1993), their value in building competitive advantage (Barney, 1991; Dierickx and Cool, 1989), or their role in the internationalization process (Denekamp, 1995; Mitchell, Shaver, & Yeung, 1992). In measuring intangible resources, researchers have tended to use proxies for each intangible asset such as advertising intensity, R&D intensity (Capon, Farley & Hoenig, 1990; Erickson & Jacobson, 1992; Lunn, 1989), and legal intensity (Denekamp, 1995) without considering how these assets may directly impact the market value of the firm. This paper seeks to expand this literature stream in two ways. First, the market value of newly public biotechnology firms is used as a proxy for the value of the firm's intangible resources. These newly public firms have few if any products and little or no income to help the market in firm valuation, thus the firm's value is held almost totally in the form of intangible resources. Second, this paper empirically shows how the market values an initial stock of intangible resources.
Small, high technology companies face, as major hurdle to their growth and development, the acquisition of capital. Organizations dependent on long, expensive, and risky development projects find the acquisition of capital to be particularly difficult. This may be due to the fact that information asymmetries between investors and entrepreneurs are extremely pronounced when the entrepreneurial endeavor is highly technical and depends on cutting-edge scientific research for its success.
Firms which base their growth and development on cutting edge scientific research pose significant problems for the market because investors largely do not have the specific knowledge necessary to evaluate the scientific capabilities of the organization and the probability of the organization successfully commercializing their basic research (Burrill & Lee, 1992). These organizations depend almost totally upon their proprietary knowledge and are therefore unlikely to provide information detailed enough about their research to allow investors to accurately evaluate the organization's chances for success. These firms are trapped in Arrow's paradox (Arrow, 1962). To properly evaluate an organization's initial public offering, investors require detailed information about the organization's proprietary research, but if the firm discloses this information they increase the risk of their proprietary knowledge being transferred to competitors. Without this disclosure, however, investors are unable to accurately assess the organization's market potential.
To overcome these information asymmetries, entrepreneurs may send signals to potential investors which are meant to accurately represent the quality of the organization. Investors may use a number of observable characteristics (earnings, size, market share, total assets, etc.) as well as entrepreneurs' signals to evaluate organizations entering the equity market. However, since it is in the best interest of the entrepreneur to highlight the strengths and obscure the organization's weaknesses, the entrepreneur must send signals which investors can observe and believe to be credible. Spence (1973) argued that such credibility arises when the signal imposes non-trivial costs on the entrepreneur sending the signal. These costs indicate that the entrepreneur expects the future benefits from the signal to exceed the signal's current costs.
During the previous decade entrepreneurs in biotechnology firms have confronted the problem of asymmetrical information. Burrill and Lee (1993) report that 225 new biotechnology firms have raised capital using initial public offerings (IPOs). In most cases, these biotechnology firms have been young, small organizations which are undertaking highly uncertain projects dependent upon the commercialization of recent scientific discoveries (Burrill & Lee, 1992). Most of the organizations are years away from any significant revenue stream and have no assets other than their scientific capabilities (Burrill & Lee, 1993). To succeed, these organizations must accurately evaluate the commercial potential of a recent scientific discovery and possess the skills and knowledge necessary to move this discovery through the development process. The organization's ability to complete this task depends upon its scientific knowledge, its access to additional relevant knowledge, and the skills of its top management team, in other words its intangible resources. In essence, the value of the equity of these organizations depends on their intangible resources. The problem facing entrepreneurs in biotechnology has been how to overcome these information asymmetries and signal the strength of their intangible resources. This study focuses on two broad categories of intangible resources which can help investors overcome information asymmetries: top management team characteristics and scientific knowledge. The organization of this paper is as follows. Section I presents a literature review and hypotheses. Section II discusses the data and methodologies. Section III analyzes the results. Finally, section IV offers a summary and concluding remarks.
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