Factors Affecting the Characteristics of Boards of Directors: An Empirical Study of New Zealand Initial Public Offering Firms

Abstract

This study examines the associations between the characteristics of boards of directors of initial public offering (IPO) firms and the availability of growth opportunities and level of inside share ownership of these firms. Three characteristics of boards of directors are examined: board size, proportion of outside directors, and the separation of the CEO and chairperson's roles (dual leadership). The impact of firm size on board characteristics is controlled for in the empirical tests. Based on a sample of 110 New Zealand firms that made initial public offerings of equity securities over the period 1983 to 1987, this study finds that firms that have lower inside share ownership tend to employ larger boards. In addition, the proportion of outside directors is positively related to the extent of growth opportunities available to a firm and negatively related to inside share ownership. Finally, firms with relatively more growth opportunities are likely to have dual leadership. Although some contrary results are found, the findings from this study provide some support for arguments that firms with greater agency problems, attributable to low inside share ownership and significant growth opportunities, are likely to choose boards of directors that are more effective at mitigating these problems.