Corporate Governance and Valuation of IPOs

Abstract

We synthesize the positive interest-alignment hypothesis proposed by La Porta et al. (1999) and Claessens et al. (2000), the reduced-control hypothesis proposed by Brennan and Franks (1997), and the informativeness hypothesis proposed by Fan and Wong (2002) in explaining the relationship between corporate governance and comparable price multiples and the relationship between corporate governance and initial returns for 218 Taiwanese IPO firms in the sample period between 1992 and 2001. The results support the interest-alignment argument that the controlling shareholder's cash flow rights is positively associated with the comparable price multiples, while a deviating voting-cash structure associating with the controlling shareholder is negatively corrected with the comparable price multiples. The relationship between corporate governance and the initial return is less significant in that the prediction from the interest-alignment argument and that from the reduced-monitoring hypothesis is contradictory when the controlling shareholder invests high cash flow rights. The informativeness hypothesis receives mixed support in that the result from the information content of the ownership structure is identical to that from the interest-alignment hypothesis, while the result from the accessibility of information is less supported.