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IPO Firm Performance and Its Link with Board Officer Gender, Family-Ties and Other Demographics

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Abstract

Issues of social justice underlie the clamour for greater gender balance in top-management. The present study reveals that pursuit of such social justice is also value-enhancing in relation to the longer-run performance of initial public offerings (IPO) stocks, especially where female board members are unencumbered by family-connection with other directors. This study examines the economic benefits of board gender diversity for state- and privately controlled firms in the Hong Kong IPO market. Gender board diversity is much less common in state-run IPO firms. Within the subset of privately controlled IPO firms, distinction exists between entities that accommodate family-connected board officers and those that do not. Specifically, this study focuses on family-ties between board members. This issue allows for finer-grained assessment of family influence on firm performance. Stronger post-listing stock, return-on-assets and sales-on-assets performance arise in (1) privately controlled firms without family-connected board members and in (2) state-run entities. Gender diversity thus serves as a positive, but only when female director presence is untrammelled by family associations between directors. However, there is little evidence of a link between female board representation and IPO underpricing. Relative to state-backed issuers, privately controlled firm boards accommodate more women, younger officers and a broader mix of nationalities, but appear more-inclined to unify CEO and chair positions. Board duality, the fraction of independent directors and directors’ age and nationality exhibit little relation with initial and aftermarket stock returns. In prescriptive terms, minority investors gain from the inclusion of female directors, especially when IPO firm directors are unencumbered by family-affiliation with other board members. Results therefore add to the clarion of calls for greater female board presence.

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Notes

  1. For specific disclosure requirements, see HKEx MBLR, Appendix 1, Part A, 41(3): http://en-rules.hkex.com.hk/en/display/display_main.html?rbid=4476&element_id=3744. Thanks are due two anonymous reviewers for their comment on earlier drafts of my paper. I also wish to express appreciation to attendees at my seminar presentation of this paper, held at the School of Accounting and Commercial Law, Victoria University of Wellington, New Zealand.

  2. Mulcahy and Linehan (2014) offer further UK support. Adams et al. (2009) report limited evidence for the US.

  3. Sarkar and Selarka’s (2015) analysis is instructive. However, their findings on gender diversity and family-ties relate specifically to the institutional, governance and cultural environment of India. First, it is not clear whether one can extrapolate such findings to other settings. Second, they (p. 14) only investigate manufacturing entities. Third, the study excludes firms with any level of state equity ownership (p. 15). Fourth, all firms in their study are established issuers and not IPOs. Fifth, the average size of firms considered is small. Sarkar and Selarka (2015, p. 43) report means for the log of total assets between 8.31 and 9.31. In my sample, the mean for log of total assets (for assets immediately prior IPO) is 21.51.

  4. FAMFOCB = 1 for firms with two or more family-connected members. INEDs should be free of any material ties. I do not consider board members’ family-ties with the same company’s senior management and/or principal owners.

  5. Terjesen and Singh (2008) also consider women’s political representation. From study of 43 jurisdictions they reveal that women are more likely to enter boards where female political representation is more recent and successfully implemented.

  6. A small proportion of the H-listed firms had corresponding A-share listings in Shanghai or Shenzhen. Such A-shares are a separate and non-fungible block of stock distinct from the same entity’s listed H-shares. Protracted pricing differences exist (see, for example, Chang et al. 2013). Forty-two of the 269 IPO firms were listed as H-shares. Of these, only four had established A-listing prior to H-listing. A further seven H-issuers organized a complementary A-listing on the same day or within a few days of H-listing. Of the non-H-share firms (n = 227), none had overseas cross-listing at the time of IPO.

  7. This is in respect of US-IPOs pitched between 1999 and 2001. Likewise, Handa and Singh (2015) observe no significant effect between IPO underpricing and the proportion of women on Indian-listed firm boards.

  8. See Handa and Singh (2015, p. 189) for cogent analysis of this literature in relation to IPOs and women.

  9. Van Essen et al. (2012) argue that R&D strategies may explain links between Asian board make-up and financial returns.

  10. Their findings are limited by sample size and a single-year focus (1993).

  11. This contrasts with findings for the US (Adams and Ferreira 2009), where on balance weaker family-affiliations exist.

  12. I exclude stock transfers from GEM and all introductions. Three equity offers are also excluded (from 272): One share offer of an already listed company; a unit IPO (i.e., shares plus warrants); and an IPO with dominant preferential allocation.

  13. Only one HRC case has intra-board family-ties. This is Guanzhou R&F (see page 145 of Prospectus, 30/06/05: http://www.hkexnews.hk/listedco/listconews/SEHK/2005/0630/02777/EWP115.pdf).

  14. Linfair Holdings (Prospectus, 27/05/2005: http://www.hkexnews.hk/listedco/listconews/SEHK/2005/0527/LTN20050527000.htm) reports directors’ biographies under “Directors, Senior Management and Staff” (pp. 79–80) and “Directors” (Page 30). I refer to additional company announcements in cases where a board member’s gender is not apparent from prospectus details. I am grateful to Karen Lee, Tracy Wong and Jessica Yan for assistance in printing-out prospectus document sections and for help in cross-checking family-ties and other board demographics. This was done several times to ensure data accuracy. I also acknowledge HKEx’s Ying Wan-Leung for answering data queries and Gary Yan for downloading Datastream data.

  15. Three of the 42 H-issuers had non-state controllers (China Minsheng Bank, ASMC and Guanzhou R&F). ‘Legal-persons’ require state approval to manage assets. A number of other H-issuers had minority “legal-person” stakes at IPO.

  16. Specifically, see Note 5 of Page 16 of the HKEX CPBD (2012) report.

  17. For 1999–2003, Zhang (2008, p. 446) reports a duality rate of 17 % in seasoned state-backed firms on HKEx. I determine board duality from issue documents and/or post-IPO interim or annual reports where such information is incomplete.

  18. Refer to Page A14-05 at: http://en-rules.hkex.com.hk/net_file_store/new_rulebooks/h/k/HKEX4476_3828_VER10.pdf.

  19. As an example, Alltronics Holdings Ltd. (Prospectus date: 30 June 2005) report the benefits of a unified CEO/Chair in its Interim Report 2015 (21/9/2005: 17): http://www.hkexnews.hk/listedco/listconews/SEHK/2005/0930/0833/EWF101.pdf.

  20. My regressions in this area, while not reported, are available on request.

  21. In a very small minority of cases, prospectus disclosures describe a board officer with more than one nationality. In such cases, and for the purposes of the analysis in this section, the non-Chinese nationality is ascribed such persons.

  22. Nationality constitutes the prospectus-declared national-affiliation of a board officer. PerOther thus serves as a control for board heterogeneity. However, Nationality does not necessarily offer insight into ethnicity. Among US Fortune 1000 entities’ boards, Carter et al. (2003) find that greater racial diversity correlates with higher firm valuations. In another US-based study, Carter et al. (2010) demonstrate endogeneity in the relation and argue that a “contingency” account best fits the firm value-racial diversity dynamic. Thanks are due an anonymous reviewer for guidance on the above.

  23. This paper’s tables exclude such results.

  24. Such firms contain proportionately more INEDs, as reflective of smaller board size and a requirement for at least three INEDs.

  25. The relevant difference between means t statistics is 1.958 (p = 0.052) for sub-samples with assumed equal variance.

  26. The Pearson correlation between number of INEDs and FemCEO is −0.112 (p = 0.065). Two-hundred and two firms had three INEDs, 45 had four and only 22 five or more. The minimum number of INEDs is three (see Rule 3.10, HKEx MBLR: http://en-rules.hkex.com.hk/net_file_store/new_rulebooks/h/k/HKEX4476_2064_VER10.pdf). PerIndd has negative correlation with board size. From 2013, HKEx requires a third of board members to be INEDs (Rule 3.10A of HKEX MBLR).

  27. Female CEOs are present in only seven NFAMFOCB and two HRC firms, but in 18 FAMFOCB entities (Tables 2, 3).

  28. For Chinese A-listed entities, Liu et al. (2014) reveal that gender diversity has a stronger performance effect in firms dominated by legal-person (or non-state) shareowners.There is also the issue of whether an optimum level of gender board balance exists. I do not specifically address this question. However, the broader literature suggests diminishing returns beyond certain levels of female board representation (see, for example, Dunstan et al. 2011 and Christiansen et al. 2016, p. 16). I thank Tony Van Zijl for comment on this issue. The wider team literature is also instructive. For example, Hoogendoorn et al. (2013) report stronger financial performance in teams with a more or less equal share of male and female members.

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  1. Department of Finance, The Business Administration Faculty, The Chinese University of Hong Kong, Room 1212, Cheng Yu Tung Building, Sha Tin, New Territories, Hong Kong

    Paul B. McGuinness

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Appendix

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See Table 10.

Table 10 Descriptive statistics (Eq. 1 variables)
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McGuinness, P.B. IPO Firm Performance and Its Link with Board Officer Gender, Family-Ties and Other Demographics. J Bus Ethics 152, 499–521 (2018). https://doi.org/10.1007/s10551-016-3295-3

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