Bucking the Trend: Why do IPOs Choose Controversial Governance Structures and Why Do Investors Let Them
55 Pages Posted: 5 Jan 2017 Last revised: 16 Dec 2017
Date Written: August 25, 2017
While the percentage of S&P1500 firms with classified boards has decreased from nearly 60% to less than 40% since 1990, trends among IPO firms have gone strongly in the opposite direction. The percent of firms going public with a classified board has increased from 40% in 1990 to nearly 80% today. Results provide strong support for differences in the value of classified boards across firms contributing toward these trends, with market forces pushing each group in the value-increasing direction. We find little evidence that the increased tendency of IPO firms to adopt classified boards is driven by agency issues. Rather, results suggest that classified boards potentially protect newly public firms from the influence of shareholders that may not appreciate the unique aspects of these firms and may push for change that is not in the firm’s best interests.
Keywords: IPO, Classified Board, Governance
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