The Price of Power: Valuing the Controlling Position of Owner-Managers in French IPO Firms

Abstract

Once a firm has gone public, the entrepreneur oftenacts as the controlling owner and manager. An agency conflict between theowner-manager and minority shareholders can ensue. The impact of thecontrolling position of owner-managers on IPO firm value is examinedinFrance, where legal investor protection is scarce. Analysis of data on 299 IPOs on the Paris Bourse from January 1993 toDecember 1999 reveals that the relationship between firm value and theowner-manager's post-IPO cash flow ownership is positive when he or she is notin full control. The inflection point at which cash flow ownership has anegative impact on firm value varies from 50 to 60 percent. Investors are awarethat firm value decreases as the owner-manager assumes more power. By reachingan agreement with other pre-IPO shareholders, owner-managers commit to reducingtheir private benefit consumption. Such shareholder agreements enhance thevalue of the firm. (SAA)

Keywords: Firm value, Shareholders, Firm ownership, Public firms, Initial public offerings (IPO), Operator ownership, Wealth, Cash flow, Manufacturing industries, Service industries, Firm control, High technology industries