Corporate Governance in IPOs

It is increasingly recognized in the management literature that the initial public offering (IPO) is an important stage in the life cycle of privately held and entrepreneurial firms. At this critical juncture, a firm has overcome the first challenges of its entrepreneurial phase and entered a growth stage. As Fama and French ( 2004 : 229) emphasize, an IPO “is the point of entry that gives firms expanded access to equity capital, allowing them to emerge and grow.” An IPO can provide an entrepreneurial firm with critical resources for its future expansion. It can also provide the entrepreneur with the first substantive access to cash from their investment of time and resources in the entrepreneurial effort.

Despite the growing awareness of the importance of IPOs among both academics and the investor community, the process by which a privately held fi rm transforms itself into a publicly traded company is still not well understood. While numerous studies have investigated the determinants of the going public decision (e.g. Booth and Smith, 1986; Jain and Kini, 1999 ) and post-issue performance (e.g. Beatty and Ritter, 1986 ; Brav, Geczy, and Gompers, 2000 ; Espenlaub and Tonks, 1998 ; Michaely and Shaw, 1994 ), there is relatively little research on the related but equally important issue of what factors influence the corporate governance mechanism of a fi rm at IPO stage, and how the specific characteristics of this mechanism such as board composition, executive incentives,and ownership interests of private equity investors may aff ect the IPO’s performance.