Strategic Signaling and IPO Performance: A Social Judgment Perspective

Despite the widespread adoption of signaling theory in business research, there exists no research on how signals are received and interpreted by receivers. The implicit assumption of is that so long as a sender sends a signal, receivers will receive and interpret the signal as intended. While this research has made a strong contribution, the receiver side has largely been ignored. The social context of the signal will affect how receivers interpret the signal. In this regard, we postulate that the social cognition of signal receivers likely influences signal efficacy during the transmission process. By theorizing and examining social cognition of receivers, our proposed research represents an attempt to fill such gap.Drawing on social judgment theory in the social cognition literature, we posit that receivers are susceptible to the social context wherein the signal is sent, and such context will influence how receivers judge the signal. A receiver is primed by the social context (social priming) and categorizes the information content associated with the stimulus (social categorization). The evaluation of a target stimulus depends on both the target stimulus itself and the non-target stimulus in the social context (social judgment). Two key social judgment effects have captured the most attention: assimilation effect and contrast effect. When target stimulus is judged as similar to non-target stimulus (target stimulus and non-target stimulus are included within the same category), the assimilation effect will take place; when the target stimulus is judged as dissimilar to the non-target stimulus (non-target stimuli becomes a standard of comparison), the contrast effect will happen. Assimilation effect influences judgment in a way that is congruent with non-target stimulus whereas contrast effect influences judgment in a way that is incongruent with non-target stimulus. The main purpose of the proposed study is to explore if and how social judgment, in terms of assimilation and contrast effects, moderates the efficacy of IPO underwriters as a signal in affecting investor sentiment and hence IPO performance.We adopt a multi-method approach. Archival data collected from various data sources are used to test the hypotheses, and lab experiments are carried out to offer stronger causal relationship tests. Using multiple methods produces results that are more robust and convincing than do single method studies. The inclusion of cognitive/behavioral phenomena, such as in our proposed study, will particularly benefit from the use of lab experiments to help explain and confirm results derived from archival data testing.