When status substitutes for performance: signal suppression and heuristic dominance in private equity investment decisions

Securing funding is a critical challenge for entrepreneurs, often exacerbated by information asymmetry. Using a dataset of 411 private equity cases, we examine whether direct and indirect employment ties help overcome this asymmetry through the mediating roles of reputation, social obligation, and social signaling. Our analysis identifies social signaling, reflecting the symbolic credibility of affiliations with reputable organizations, as the dominant mechanism mediating the effects of employment ties on investment decisions. Contrary to prior research emphasizing reputation (Podolny, 1994; Stuart, Hoang, & Hybels, 1999) and social obligation (Gulati, 1995; Shane & Cable, 2002) as key mediators, we find these mechanisms do not independently mediate the effects of employment ties when social signaling is considered. By extending signaling theory (Spence, 1973) to entrepreneurial context, we underscore the importance of symbolic associations in shaping investment outcomes, offering actionable insights for entrepreneurs and investors navigating uncertain, high- stakes environments.