Bucking the Trend: Why do IPOs Choose Controversial Governance Structures and Why Do Investors Let Them
64 Pages Posted: 5 Jan 2017 Last revised: 7 Oct 2020
Date Written: October 6, 2020
While the percentage of mature firms with classified boards or dual class shares has declined by more than 40% since 1990, the percentage of IPO firms with these structures has doubled over this period. We test whether IPO firms implement these structures optimally or whether they are utilized to allow managers to protect their private benefits of control. Both shareholder voting patterns and changes in firm types going public suggest that the Optimal Governance hypothesis best explains IPO firms’ use of classified boards. There is considerable heterogeneity across dual class firms, with some more consistent with optimal governance and others with agency.
Keywords: IPO, Classified Board, Dual Class, Governance
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