Bucking the Trend: Why do IPOs Choose Controversial Governance Structures and Why Do Investors Let Them

70 Pages Posted: 8 Jun 2022 Last revised: 5 Aug 2022

See all articles by Laura Casares Field

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics

Michelle Lowry

Drexel University; European Corporate Governance Institute (ECGI)

Date Written: August 4, 2022

Abstract

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 Agency Hypothesis best explains IPO firm’s use of dual class, particularly when there is a large voting-cash flow wedge. In contrast, among firms with high information asymmetry, classified board structures are better explained by the Optimal Governance hypothesis.

Keywords: IPOs, governance, dual class, classified board, shareholder voting, founders, carve-outs

JEL Classification: G23, G32, G34

Suggested Citation

Field, Laura Casares and Lowry, Michelle B., Bucking the Trend: Why do IPOs Choose Controversial Governance Structures and Why Do Investors Let Them (August 4, 2022). Journal of Financial Economics (JFE), Forthcoming, European Corporate Governance Institute – Finance Working Paper No. 830/2022, Available at SSRN: https://ssrn.com/abstract=2889333 or http://dx.doi.org/10.2139/ssrn.2889333

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States
302-831-3810 (Phone)

Michelle B. Lowry (Contact Author)

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
649
Abstract Views
2,819
rank
58,671
PlumX Metrics