Managerial Ownership Structure and IPO Survivability
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Springer 2006
Managerial Ownership Structure and IPO Survivability CHI-YIH YANG1,* and HER-JIUN SHEU2 1 Department of Information Management, Ming-Hsin University of Science and Technology, Taiwan ; 2Department of Management Science and Graduate Institute of Finance, National Chiao Tung University, Taiwan (*Author for correspondence, e-mail: [email protected])
Abstract. Based on agency theory [Jensen and Meckling: 1976, Journal of Financial Economics 3: 305–360] how managerial stock ownership affects the survival of initial public offerings (IPOs) is explored in this paper. A sample of 560 IPOs listed in Taiwan is examined using the accelerated failure time model, a survival analysis technique. Insiders, the broad definition of management, are further classified into top officers and outside directors to conduct a detailed study. It is observed that the survival time of IPOs first decreases and then increases with the percentage of total insider ownership at the time of offering, forming a U-shaped relationship. Additionally, the survival time is positively affected by the officer-to-insider holding ratio. The results suggest that equity stake owned by management, particularly by top officers, of an IPO firm should be encouraged in order to reduce agency cost, and thus enhance firm survivability in the aftermarket. Key words: agency theory, initial public offerings, managerial ownership, survival analysis
1. Introduction Initial public offering (IPO) firms are organizations that offer their stock to the public market for the first time while moving from private to public ownership. An IPO firm undergoes numerous internal changes as it submits to the scrutiny of shareholders, investment bankers, and the Securities and Exchange Commission (Welbourne and Andrews, 1996). It then tries to acquire professional management, achieve a highly profitable business and provide transparency in organization and operations. The aftermarket performance of initial public offerings has received increased attention since Ritter’s (1991) exposure of the potential wealth hazard of a buy-and-hold strategy toward investing in IPOs. However, the emphasis thus far has been on the patterns in issuing activity, short-term underpricing, and long-run underperformance (Ritter and Welch, 2002). In this study, we focus on another critical and largely ignored aspect of the process of going public, namely, the survival time of IPO firms in the aftermarket. The question of
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survivability becomes especially important following periods of fundamental organizational transformations, and few events can compare with an IPO in terms of the fundamental change to strategy, structure, personnel, control process, and operating procedures of a firm. As to the process of new firm financing, Aghion and Bolton (1992) argue that different actors have different utility functions. The investor is interested only in cash flows, while the entrepreneur is interested in both cash flows and private benefits (such as reputation, personal satisfaction, etc.). T
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