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Bucking the trend: Why do IPOs choose controversial governance structures and why do investors let them?

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  • Field, Laura Casares
  • Lowry, Michelle

Abstract

While the percentage of mature firms with classified boards or dual class shares has declined by more than 40% since 1990, the percentage of IPO firms with these structures has doubled over this period. We test whether IPO firms implement these structures optimally or whether they are utilized to allow managers to protect their private benefits of control. Both shareholder voting patterns and changes in firm types going public suggest that the Agency Hypothesis best explains IPO firm's use of dual class, particularly when there is a large voting-cash flow wedge. In contrast, among firms with high information asymmetry, classified board structures are better explained by the Optimal Governance hypothesis.

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  • Field, Laura Casares & Lowry, Michelle, 2022. "Bucking the trend: Why do IPOs choose controversial governance structures and why do investors let them?," Journal of Financial Economics, Elsevier, vol. 146(1), pages 27-54.
    • Handle: RePEc:eee:jfinec:v:146:y:2022:i:1:p:27-54
    DOI: 10.1016/j.jfineco.2022.06.004
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    References listed on IDEAS

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    4. Seoungpil Ahn, 2024. "The Value of Takeover Defenses and the Interaction Effects of Firm Characteristics," JRFM, MDPI, vol. 17(8), pages 1-16, August.

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    More about this item

    Keywords

    IPOs; Governance; Dual class; Classified boards; Shareholder voting; Founders; Carve-outs;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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