Does Presence of Foreign Directors Make a Difference? A Case of Indian IPOs

Abstract

In their pursuit to garner resources and support for their IPO, the issuing firms prepare well on all fronts. Corporate governance, specifically board structures, is a critical issue that affects the decision quality and also influences the investors’ psyche. Building on theories of agency, resource dependency and signaling, this article attempts to study the effects of presence of foreign directors on firm-specific and board-related characteristics of IPO issuing firms. Adding to the scant literature on national diversity, this study concludes that foreign directors do signal a firm’s intent of internationalization and contribute to strengthening corporate governance but national diversity does not translate into IPO returns. Exploring a sample of Indian IPOs issued from April 2001 to March 2017, this study finds that presence of foreign directors on the boards brings about differences in governance mechanisms wherein internationalized boards were found to be stronger on governance front. Larger boards, more committees, less number of related directors, better board interlocking were the benefits that manifested from presence of foreign board members. Issue size and issue price of shares at the time of IPO are found to be significantly higher for firms with foreign directors on their boards reflecting better acceptance among the investors.