Academic journal article Australasian Accounting Business & Finance Journal

Director Experience and the Performance of IPOs: Evidence from Sweden

Academic journal article Australasian Accounting Business & Finance Journal

Director Experience and the Performance of IPOs: Evidence from Sweden

Article excerpt

Introduction

The decision to go public is one of the most important decisions made by a small firm. In making that decision, the small firm transforms its operations from the private arena to one of public scrutiny (Certo 2003). A public offering provides the firm with access to the capital needed to finance future growth (Martin 2001; Ou & Haynes 2006). An initial public offering (IPO) also increases future possibilities to access debt capital (Cressy & Olofsson 1997). The dependence of all firms on capital for growth is unquestioned, but the changes that are imposed on small firm governance, as a result of the decision to go public, have received only limited attention. Historically, most studies of IPOs have been dominated by traditional finance researchers focused on the existence of underpricing and long-run underperformance of IPOs (Carter et al. 1998). However, given the importance of access to finance for small growth firms, there has been increasing interest among small business researchers in examining the IPO from a small business or entrepreneurship perspective (e.g. St-Pierre 2000; Certo et al. 2001a; Certo et al. 2001b; Ou & Haynes 2006; Carpentier et al. 2008; Westerman et al. 2008; Zimmerman 2008). Zimmerman (2008) highlighted the importance of the firm's top management team in completing a successful IPO. Westerman et al. (2008) found that venture capitalist backing and stock options for employees had a positive effect on new stock price performance. It would appear that the governance structure of the firm at the time of the IPO, e.g. experienced directors and managers or venture capital involvement, reassures investors who have a limited depth of information about the firm. Most studies of IPOs with small firm focus are concerned with efforts to reduce information asymmetry between the firm and future investors (Daily et al. 2003). Board structure and experienced board membership may substitute for information access, which removes some of the problems inherent in information asymmetry at the time of the offering (Certo et al. 2001a, Certo et al. 2001b).

When transitioning from private to public ownership, corporations make substantial efforts to meet regulatory requirements as well as the expectations of new investors (Filatotchev & Bishop 2002; Howton 2006; Certo et al. 2009; Bruton et al. 2010). Most of the structural changes in a firm going public are related to corporate governance in general and the board of directors in particular (Certo et al. 2001b; Filatotchev & Bishop 2002; Baker & Gompers 2003; Burton et al. 2004). The role of the board, and the firm's utilisation of it, changes throughout the life cycle of the firm (Lynall et al. 2003; Cornelius 2005). The owners' ability to adapt the board of directors to different types of transitions, such as an IPO, could be vital for financial success but the different competencies needed are not necessarily found within the same boards (Söderström 2003). Many researchers have stressed that the structure of the board is a key factor influencing board performance and consequently firm performance (e.g. Daily & Dalton 1992; Gertner & Kaplan 1996; Certo et al. 2001a; Howton 2006). However, there is no consensus on an optimal board structure among researchers or practitioners (Gertner & Kaplan 1996). Empirical research has given inconclusive and mixed results. In this study board structure is extended through the concept of director experience. Specific aspects of experience among the board of directors are examined in relation to aftermarket performance of an IPO; that is, underpricing/initial returns and long-run market performance.

An IPO represents an important milestone in a firm's life cycle, not only changing the capital structure but also bringing increased attention to the firm. The firm must also conform to additional regulations and practices as they move over the threshold from being a private entity to a public one, especially in terms of governance structures (Filatotchev & Bishop 2002). …

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