The Voluntary Use of Outside Directors by Initial Public Offering Firms

Abstract

This study examines the associations between the characteristics of initial public offering (IPO) firms and the voluntary use of outside directors. Five firm characteristics are examined: inside share ownership, variance of aftermarket returns, operating history, leverage, and firm size. Based on a sample of 110 New Zealand firms which made initial public offerings of equity securities over the period 1983 to 1987, the study finds that greater variance of after‐market returns and a lower inside share ownership are associated with a greater proportion of outside directors. In addition, firms without operating histories are likely to use relatively more outside directors. However, leverage and firm size are not significantly related to the proportion of outside directors. Overall, the findings from the study are generally consistent with arguments that firms with greater agency problems are likely to use relatively more outside directors because these directors are perceived to be more effective in mitigating agency problems.