Stock Market Reactions to Customer and Competitor Orientations: The Case of Initial Public Offerings

Recognizing that initial public offerings (IPOs) represent the debut of private firms on the public stage, this study investigates how pre-IPO customer and competitor orientations (CCOs) affect IPO outcomes. Building on information economics, we propose that CCOs influence investors' sentiments toward an IPO and that both IPO-specific variables (which influence the credibility of CCO information) and facets of the organizational institutional and task environments (which influence the appropriateness of CCO information) moderate this influence. We test the framework using data collected from computer-aided text analysis, expert coders, and secondary sources for 543 IPOs across 43 industries between 2000 and 2004. A Bayesian shrinkage model, which accounts for industry-specific effects and uses latent instrumental variables to address CCO endogeneity, shows that CCOs positively influence IPO outcomes. Furthermore, (1) underwriter reputation and venture funding positively moderate the effects of CCOs; (2) technological and market turbulence positively and institutional complexity negatively moderate the effect of customer orientation; and (3) technological turbulence, competitive intensity, and institutional complexity positively moderate the effect of competitor orientation. Also, accounting for endogeneity using latent instrumental variables substantially improves the predictive validity of the model, relative to alternative model specifications.