The Impact of Corporate Governance Mechanisms on the Commitment of Managers in an IPO Setting: Evidence from Korean Small and Venture Firms

Youngjoo Lee

doi:10.3390/su14020730

Abstract

Managers’ commitment and dedication crucially affect the sustainable growth of firms. When private companies first offer their shares to the public in an initial public offering (IPO), an IPO lockup is one way of revealing managers’ commitments. IPO lockups are agreements that promise not to sell the shares retained by pre-IPO shareholders for a specified period in the market after the IPO. This paper investigates the impact of corporate governance mechanisms on the length of the lockup period. The paper’s sample consists of IPO firms that have gone public in Korea’s KOSDAQ market, which is a listing venue for small and venture companies. The major findings of this paper are as follows: first, the length of the lockup period increases with the number of outside directors and, second, IPO firms with audit committees have longer lockup periods than those without them. These results indicate that managers of firms with greater board independence choose a longer lockup period when going public. This paper also finds that the lockup period is positively related to the presence of venture capitalists serving as directors of IPO firms, which suggests that venture capital directors may ensure that managers have longer lockups. Overall, these findings suggest that, when small and venture companies go public, managers may use the IPO lockup as a commitment device that complements corporate governance mechanisms in reducing investor concern about the moral hazard problem of managers.

Highlights

Private companies raise a large amount of capital when they first offer their shares to the public in an initial public offering (IPO) [1]
This paper finds that the lockup period is positively related to the presence of venture capitalists serving as directors of IPO firms, which suggests that venture capital directors may ensure that managers have longer lockups
I find that IPOs with longer than 6-month lockups have more outside directors and are more likely to have an audit committee, venture capital backup, and venture capitalist representation on the board compared to IPOs with 6-month lockups

Summary

Introduction

Private companies raise a large amount of capital when they first offer their shares to the public in an initial public offering (IPO) [1]. IPOs are critical for the sustained growth of small and venture enterprises, which need capital for their projects until the firms generate stable revenue and income [2]. The IPO markets involve various stakeholders, including shareholders and employees of issuers, outside investors, financial intermediaries, media, and the government. In IPO markets, outside investors face the adverse selection problem because insiders of IPO firms possess superior information about the firms than outsiders [3]. Prior literature presents theoretical models that demonstrate how financial intermediaries that serve as underwriters in the IPO markets alleviate the adverse selection problem by discounting the offering prices of issuers from their fair values [4,5,6]. Regulators play a role in protecting unsophisticated investors who participate in the IPO markets

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