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Initially Distracted: The Influence of Boards on Agency Costs in Initial Public Offering (IPO) Firms

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New Frontiers in Entrepreneurship

Part of the book series: International Studies in Entrepreneurship ((ISEN,volume 26))

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Abstract

While the process of pursuing an initial public offering (IPO) provides new capital with which new ventures might pursue significant opportunities, research suggests that many IPO firms decrease in value subsequent to the new offering. Using an agency perspective, we argue that the IPO process itself may not only raise direct governance costs (due to increased monitoring and bonding), but may also create a distraction for managers who need to remain focused on the ­strategy to effectively use a large infusion of capital from the IPO. Likewise, we argue that ­governance participants, especially board members, will be distracted by the work necessary to take the firm public and, as such, may not be focused on the strategic ­monitoring necessary for continued firm’s viability. This lack of monitoring may also allow managerial opportunism to be more prevalent, especially given the large amount of capital available to managers once the IPO is completed. Accordingly, we argue that excessive governance costs (both direct and indirect) may be associated with the IPO process and subsequent IPO firm performance.

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Notes

  1. 1.

    The IPO process (as mentioned in Fig. 2.1) begins with the decision to take the firm public and ends with value stabilizing efforts (e.g., creating a market in the new public stock, providing liquidity to exiting investors) after the stock issue. See Ellis et al. (1999) for a helpful examination of this process.

  2. 2.

    Underpricing is the difference between the initial market price of the offering (e.g., at the end of the first day of trading) and the stock price set by the IPO firm managers and their underwriter.

  3. 3.

    Given the challenge of gaining access to board members and boardrooms, it is worth noting, however, that many studies use firm performance in place of actual measures of monitoring behaviors. See Gulati and Westphal (1999) and Huse et al. (2005)) for recent exceptions.

  4. 4.

    Equity carve-outs and the issuance of lettered stocks are common elements of corporate entrepreneurship strategies. In equity carve-outs, the parent corporation takes a subsidiary public by creating a new legal entity and often retains a controlling interest in the new IPO firm. In the case of lettered stocks (also referred to as tracking stocks or targeted stocks) no new entity is formed, but the parent uses an IPO to issue new stocks in a subsidiary or division so that it can be “targeted” by investors and tracked by analysts separately from the parent firm (Frank 2001).

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Author information

Authors and Affiliations

  1. Department of Management, College of Business, University of Cincinnati, 210165, Cincinnati, OH, 45221-0165, USA

    Thomas Dalziel

  2. Department of Management, College of Business, Iowa State University, 2350 Gerdin Business Building, Ames, IA, 50011–1350, USA

    Robert E. White

  3. Department of Management and Operations, College of Business, Washington State University, 644736, Pullman, WA, 99164-4736, USA

    Jonathan D. Arthurs

  4. Jones Graduate School of Business, Rice University, 6100 Main Street, MS–531, Houston, TX, 77005, USA

    Robert E. Hoskisson

Authors
  1. Thomas Dalziel
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  2. Robert E. White
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  3. Jonathan D. Arthurs
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  4. Robert E. Hoskisson
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Corresponding author

Correspondence to Thomas Dalziel .

Editor information

Editors and Affiliations

  1. Indiana University, Bloomington, 47405, USA

    David B. Audretsch

  2. Facoltà di Economia, Dipto. Impresa, Culture e Società, Università di Catania, Corso Italia 55, Catania, 95129, Italy

    Giovanni Battista Dagnino

  3. Facoltà di Economia, Dipto. Impresa, Culture e Società, Università di Catania, Corso Italia 55, Catania, 95129, Italy

    Rosario Faraci

  4. Dept. Management, Arizona State University, S. Rural Rd. 1711, Tempe, 85287-5906, USA

    Robert E. Hoskisson

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Dalziel, T., White, R.E., Arthurs, J.D., Hoskisson, R.E. (2009). Initially Distracted: The Influence of Boards on Agency Costs in Initial Public Offering (IPO) Firms. In: Audretsch, D., Dagnino, G., Faraci, R., Hoskisson, R. (eds) New Frontiers in Entrepreneurship. International Studies in Entrepreneurship, vol 26. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-0058-6_2

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