The Signaling Amplification Effect of Interorganizational Triadic Closure on IPO Pricing

Tan Li, Xibao Li, Jar-Der Luo, Jie Ren, Yue Zhang


The signaling value of a firm’s interorganizational relationships has been a long-standing topic of economic and organization research. Network ties can work as informational cues about a firm which others can then use to make inferences about the firm. However, in practice, a firm is always embedded in different types of networks, which makes isolating the effect of any one affiliation difficult, and makes the study of different types of affiliations a valuable topic to pursue. An important existing finding of this stream of research is that different types of affiliations send redundant signals, but little has been offered to clarify how a company’s organizational affiliations that are also connected to one another will influence signal value. In particular, it is not clear whether a signal is strengthened or impaired when these different types of affiliations are connected themselves. We investigate how the presence of a third tie influences any original endorsement effects, and put forward the idea that signals sent by an affiliation with two connected organizations (thus forming a triadic closure) are more powerful and helpful. When examined from the outside, the existence of this “could-be-absent” tie stands for a closer and more stable relationship between the affiliated organizations and our focal firm, which means support and devotion in a higher level. Thus, the presence of a triadic closure amplifies the original signal strength. Taking IPO events as our research context, we focus on relationships among IPO firms, already listed firms and venture capital firms. Specifically, we examine the differences between an open triad and a closed triad. In an open triad, an IPO firm is backed by a venture capital firm, and also has a board interlock relationship with an already listed firm, but these two organizations remain isolated from one another. In a closed triad, the venture capital firm has also invested in the already listed firm. We propose that the endorsement effect of a triadic closure is stronger than one backed by separated venture capital and already listed firm, and thus, IPO firms embedded in triadic closure are more likely to have their value recognized. We use the IPO events from 2000 to 2016 in the Chinese A-share market to test our hypotheses and find out that IPO firms embedded in triadic closure have higher price-earnings ratios in the issuing process, and the hotter the new issue market, the greater the positive effect of being embedded in a triadic closure. This paper also contributes to network and organizational research by comparing structural holes to network closure from the perspective of signal. Prior researches have long recognized that structural holes provide organizations with better access to diversified information and greater discretion to control, while network closure means better cooperation and trust. This paper contribute to this stream of research by showing that network closure amplifies the original endorsement effect offered by the prominent organization.

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