Principal-Principal Conflicts and IPO Pricing in an Emerging Economy

Abstract

Manuscript Type: Empirical Research Question/Issue: Recent research from the United States has advocated increasing ownership concentration and aligning ownership and control to mitigate principal-agent conflicts for entrepreneurial firms. By contrast, this study aims to demonstrate that the major governance problem in an emerging economy is principal-principal conflicts, and that increasing ownership concentration and aligning ownership and control will instead reinforce such conflicts and IPO underpricing. Research Findings/Insights: Using data from 525 IPO firms in Taiwan, an emerging economy, this study finds that increasing family ownership and institutional ownership and introducing CEO duality increase IPO underpricing, while employing independent outside directors mitigates IPO underpricing. These results are consistent with our hypotheses concerning principal-principal conflicts. Theoretical/Academic Implications: Our results are quite different from those of prior research using US data, in that institutions are weaker in an emerging economy than in the United States, where principal-agent conflicts are the main concern. Consequently, corporate governance research, particularly when conducted outside the US, should consider institutional contexts, which agency theory fails to do. As such, institutional theory offers a promising approach. Practitioner/Policy Implications: Government policies designed to address principal-agent conflicts, such as increasing ownership concentration and aligning ownership and control, may make principal-principal conflicts worse and increase IPO underpricing in an emerging economy. To mitigate principal-principal conflicts and IPO underpricing, regulatory reforms need to reduce ownership concentration, separate ownership, and control, and strengthen formal institutions that help minority shareholders monitor firm decisions.