The relative underperformance of IPOs in the long run could be a corporate governance issue. In the sample period from 1990 to 2004, the firms with strong shareholder rights out performed firms with weak shareholder rights. This effect is strong for the smaller IPO firms. If only large IPO firms are considered irrespective of shareholder rights, the difference in performance is not significant.
The research which ties IPOs with corporate governance is surprisingly limited compared to the voluminous literature which addresses the two topics separately. Both Daines and Klausner (2001) and Field and Karpoff (2002) analyze the use of takeover defenses at the date of an IPO. Daines and Klausner examine the bylaws and charters of 310 IPOs, finding that over two-thirds of their sample has anti-takeover provisions (ATPs). By looking at the cross-sectional determinants of ATP adoption, they argue that putting ATPs in place at the time of an IPO is more likely to be an effort to entrench management rather than to maximize value. Field and Karpoff reach a similar conclusion in their analysis of a sample of 1,019 IPOs from 1988 to 1992, observing that the extensive use of ATPs by IPOs is associated with a lower likelihood of being acquired, but is unrelated to premiums for acquired firms.
They find no difference in postIPO operating performance between firms with and without ATPs. Smart and Zutter (2003) look at a sample of 253 dual-class and 2,369 single-class IPOs, and found that the underpricing is greatest for single-class IPOs. Furthermore dual-class IPOs have greater institutional ownership and obtain higher price sales multiples at the time of an IPO.
Baker and Gompers (2003) view the structure of the board of directors at the time of an IPO as an outcome of a bargaining game between management and outside shareholders. They find that the presence of venture capitalists in the firm act as a balance to CEO power. Hartzell, Kalberg and Liu (2004), in a sample of 107 IPOs on real estate investment trusts (REITs) from 1991 to 1998, discovered that REIT firms with stronger governance structures not only have higher initial IPO valuations, but also have better long-term operating performance than their peers.
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IPO Performance And Corporate Governance: Evidence From The Us Stock Market
