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Moderating effects of investor experience on the signaling value of private equity placements Jay J. Janney a, * , Timothy B. Folta  b,1 a School of Business Administration, University of Dayton, 300 College Park, Dayton, OH 45469-2271, United States  b  Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, United States Received 1 July 2002; received in revised form 1 January 2005; accepted 1 February 2005 Abstract We contend that young start-up firms requiring external capital are able to differentiate themselves from competitors through their choices of investors and financing mechanisms. Private placements of equity convey efficient signals to markets for several reasons. They are (short-term) irreversible, occur after a more rigorous analysis than public offerings provide, contain governanc e mechanisms, and are generally observable by outsiders. The disclosure that investors possess a superior reputation for eval uativ e abili ty conveys an additiona l, endo rsing signal of the firm’ s pros pect s. This proves esp eci all y val uable for young er fir ms, les s capita lized fir ms, andfirms tha t hav e more rec ent ly rec eived  private equity from an experienced investor. Using an event history analysis on a sample of 329  publicly held biotechnology firms, we find firms that are perceived to be more uncertain and that disclose the presence of more prominent investors are better able to attract subsequent financing. D 2005 Elsevier Inc. All rights reserved.  Keywords: Private equity; Signaling; Reputation 1. Executive summary Because knowledge-intensive firms increasingly go public earlier in their life, the Initial Public Off eri ng (IPO) resolves a rel atively sma ller amount of inf ormation asymmetry 0883-9026/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2005.02.008 * Corresponding author. Tel.: +1 937 229 2975; fax: +1 937 229 3788.  E-mail addres ses: [email protected] (J.J. Janney)8 [email protected] (T.B. Folta). 1 Tel.: +1 765 494 9252; fax: +1 765 494 9658. Journal of Business Venturing 21 (2006) 27–44

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