Stocks and shares

The investment ceiling

Lyda Bigelow from the David Eccles School of Business, University of Utah, outlines the findings of her study which found female-led Initial Public Offerings (IPOs) are an exceptionally rare phenomenon.

The enormous publicity – and controversy – surrounding the recent IPO of Facebook has drawn attention to how the process works. While an IPO is one of the most common mechanisms for acquiring financial resources, it is surprising that female-led IPOs are extremely rare, and this can’t be attributed to a lack of female-led firms. For example, in the US, female-owned or female-led firms represent nearly 50% of all privately-held businesses, founded in the same business sectors as those founded by men.

One possible explanation hints at a potentially larger problem: a gender-based capital gap for new ventures. The results of our recent academic study suggest that female CEOs may be disproportionately disadvantaged in their ability to attract growth capital when all other factors are controlled. Despite identical personal qualifications and firm financials, for instance, female Founders/CEOs were perceived as less capable than their male counterparts, and IPOs led by female Founders/CEOs were considered less attractive investments. Respondents estimated lower share price appreciation, assigned a higher level of risk to the IPO, and were less willing to invest.

The IPO represents an important milestone for an entrepreneurial firm. It provides critical resources for a firm’s future expansion, and often provides the founder and initial investor with the first substantive financial rewards from their investment of time and resources building their business. These high-growth firms depend on access to capital and resources afforded by the IPO to realise their ambitions. Our results suggest that female founders may be disadvantaged early in this process during the evaluation of the IPO firm by professional investors, long before the entrepreneurial firm becomes a public company.

The potential economic impact of this issue is substantial. If companies led by females are disadvantaged in their ability to raise cash through the stock market, it can impact the viability and financial health of their companies, their ability to expand and compete in an increasingly global and competitive environment and, if they are unable to remain viable, the livelihoods of their employees.

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK