Regulatory Corporate Governance and the Valuation of IPO Firms

Abstract

This study aims to evaluate the effect of regulatory corporate governance mandates on the valuation of equity-issuing firms in the U.S. Using a matched sample, we examine how the Exchange Listing Requirements, specifically, and the Sarbanes-Oxley Act (SOX), generally, affect IPO valuations. Board structure compliance provides no consistent valuation benefit. We find some evidence of negative effects for firms whose board structure is significantly altered by Reform and among small firms. The absence of increased valuations post-Reform suggests that there is little to offset the loss of private control benefits that Reform represents (post-Reform insider ownership and founder involvement are lower) and, thus, at the margin, Reform creates incentives for some firms to stay private. While the 2012 JOBS Act reduced the burden of registration, reporting and accounting requirements of SOX for small firms, it did nothing to change the board structure requirements of these firms. The results of this study together with those of Wintoki (2007) and Rhodes (2018) suggest that regulations pertaining to the board structure requirements of small equity-issuing firms should either be modified to allow more flexibility or repealed altogether. If lawmakers ultimately relax these requirements, future studies may focus on changes in board structures, private benefits of control, and the rates at which firms access public equity markets.