The Interaction Among Multiple Governance Mechanisms in Young Newly Public Firms

Abstract

Confirms the finding of previous researchers that CEOownership declines following a firm’s initial public offerings (IPO).This study alsodetermines whether three governance mechanisms(compensation structure, board independence, and outside block ownership)change over time and compensate for decreases in post-IPO managerial ownership.Data on 109 firms, all of which were followed for up to eleven years aftertheir IPOs, are used to examine the interrelations among the three governancemechanisms for three subsamples of firms: those that remain independent, thosethat are acquired, and those that file for bankruptcy. Analysis of the data indicates that managerial ownership does indeed declineafter firms go public. Venture capital board membership, non-venture capitalboard independence, and unaffiliated block ownership increase as CEO ownershipdecreases following IPOs. As venture capital participation begins to decreaseover time, however, board membership increases, potentially allowing boardindependence to be maintained. Finally, the results suggest that governanceadaptations following IPOs happen only for firms that survive as independententities. (SAA)

Keywords: Firm survival, Chief executive officers (CEOs), Firm ownership, Firm governance, Boards of directors, Executive compensation, Initial public offerings (IPO), Organizational structures