Investors' perceptions of the value of internationalisation of new ventures

Abstract

This study examines the non-linear relationship between the degree of internationalisation at the time of IPO (initial public offering) and post-IPO market performance of US new ventures. The synthesis of theories framework that integrates resource-based view (RBV) and portfolio theory with signalling and information asymmetry theory is used to develop the hypotheses. The synthesis framework used to support the non-linearity between internationalisation and post-IPO performance suggests that an optimal level of internationalisation is required to exploit the full benefits of international expansion. The benefits of effective exploitation of resources and risk reduction may provide positive signals to potential investors only beyond a certain optimal level. Therefore, lower level of internationalisation may not send positive strong signals of value and future performance of new ventures to external investors but these signals turn positive beyond a certain optimal level. Further, drawing support from international new venture theory and the resourcebased view (RBV) of the firm, this study explores the premise that in order to finance their rapid internationalisation, international new ventures (INVs) go public earlier than other new ventures. Analysis were conducted on a sample 264 new venture IPOs in the manufacturing and service sectors, headquartered in the US that issued initial public offerings from 2001 to 2011. This study assumes a U-shaped relationship between the degree of internationalisation and compound holding period returns and an inverted U-shaped relationship between the degree of internationalisation and relative volatility of returns. Using least square regression, the results confirm the existence of a non-linear relationship between the scope of internationalisation and relative volatility of returns. The study also found that INVs go public earlier than other new ventures. The findings have important implications for both academics and practitioners. Investors can reduce the risk of their investments by investing in new venture IPOs that have achieved a certain optimal level of scope of internationalisation. Similarly, management can also utilize results from this study by strategically positioning or communicating information about the scope of internationalisation of their new venture when going public. Academically, this study extended insights from international business and IPO research into international entrepreneurship literature and introduced the synthesis of theories framework to understand the non-linearity between internationalisation and new venture performance.