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The data was analyzed using structural equation model on the AMOS version 3.5 software program (Arbuckle, 1993).   Descriptive statistics of the variables are presented in Table #1.  Figure #1 presents the graphical representation of our model and the coefficients and T-statistics, chi-squared, and fit measures for the model. Overall, our results present strong statistical support for the basic propositions that firm level legitimacy and the legitimacy of the industry in which the firm operates will be positively related to the amount of capital raised by a firm's IPO. The results support all nine of our hypotheses. The Chi-square for the model is insignificant indicating a good basic fit. In addition all of our goodness of fit indices are above .90 indicating that the model is a good fit for the data.


The purpose of this paper has been to examine the determinants of the legitimacy of an individual firm and the relationship between legitimacy and the amount of capital raised in a firm's IPO by studying a sample of 108 biotechnology IPO's. At the firm level our findings indicate that identification can be a successful strategy. The critical issue in establishing the legitimacy of a biotechnology firm is establishing the legitimacy of the firm's research. Therefore, by identifying themselves with highly legitimate research organizations and established pharmaceutical and chemical companies firm's were able to significantly increase their firm specific legitimacy and in turn the amount of capital they were able to raise.  Our study also makes it clear that successfully disseminating information about the firm increases its legitimacy. The number of press articles about the firm had a significant positive relationship to a firm's legitimacy. We were unable to measure the impact of the types of communication hypothesized by Aldrich & Fiol (1994), such as personal communications by the entrepreneur using 'encompassing symbolic language and behaviors'  or the use of a 'road show' which 'provides an internal consistent story about their firm', but, if they are an effective means of communications it's reasonable to speculate that they would also have a positive impact of the firm's legitimacy.

Our results have important implications for entrepreneurs preparing their firm to go public. Identification is a strategy that can dramatically increase a firm's legitimacy an  in turn it's ability to raise capital. But, timing the entry into an alliance and choosing an appropriate target organization is critical to the success of this strategy. The dissemination of information about the firm is clearly critical to the creation of firm legitimacy. Press articles prior to the IPO are important and valuable tools, and it is also likely that other communications strategies, such as personal communications, will act to increase the firms legitimacy and in turn its access to resources. Finally, it's important for an entrepreneur to recognize that an industry's legitimacy impacts that of his firm. Legitimacy does not  progress steadily upwards. Instead, an emerging industry's legitimacy may trend upward, but there will be periods during which the legitimacy of the industry will decline and periods when it will advance rapidly. These declines and advances will track the recent performance of the firms in the industry and will impact the availability of resources.

While our results provide strong statistical support for our conclusion, we must also acknowledge that our focus on biotechnology raises questions about the generalizability of our study beyond this industry. However, given the unique characteristics of the biotechnology industry, we still believe that our results are generalizable to other emerging industries.  Basic science appears to be playing a more significant role in the success and failure of individual firms (Dasgupta & David, 1994) making the evaluations of firms in these science driven industries more complex and uncertain. This makes the problems of creating legitimacy increasingly important for a wide variety of emerging industries.

While we have found strong empirical support for our model it should also be noted that there is still a significant amount of variation in the value of a firm's IPO which remains unexplained. Obviously, there remains other variables of potential interest which demand further study, including the effects of CEO and management team background, personal characteristics and remuneration. The role of personal communications in the creation of firm legitimacy. In addition, the process of industry legitimation and the role of government entities, changes in the legal environment, the public profile of the industry founders, and the role of the industry press in this process all need significantly more study.  Overall, the strategic issue of  how firms can gain, maintain and increase their legitimacy are ripe for further research and are critical issues for entrepreneurial firms and entrepreneurship researchers.

In the end our study provides strong evidence that an individual firm's legitimacy is based on the characteristics and actions of the firm and the legitimacy of the industry in which the firm operates. In addition, our results make it clear that an entrepreneur can improve his firm's legitimacy by entering alliances with respected institutions and through  the communication of information about the firm through the press. Finally, it's also apparent that an industry's level of legitimacy depends upon the recent performance of the firms in the industry and that an emerging industry's road to legitimacy will  have peaks and valleys.
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