Initially Distracted: The Influence of Boards on Agency Costs in Initial Public Offering (IPO) Firms

Abstract

While the process of pursuing an initial public offering (IPO) provides new capital with which new ventures might pursue significant opportunities, research suggests that many IPO firms decrease in value subsequent to the new offering. Using an agency perspective, we argue that the IPO process itself may not only raise direct governance costs (due to increased monitoring and bonding), but may also create a distraction for managers who need to remain focused on the ­strategy to effectively use a large infusion of capital from the IPO. Likewise, we argue that ­governance participants, especially board members, will be distracted by the work necessary to take the firm public and, as such, may not be focused on the strategic ­monitoring necessary for continued firm’s viability. This lack of monitoring may also allow managerial opportunism to be more prevalent, especially given the large amount of capital available to managers once the IPO is completed. Accordingly, we argue that excessive governance costs (both direct and indirect) may be associated with the IPO process and subsequent IPO firm performance.