Board Governance and IPO performance in the shortrun and long-run

Abstract

In light of the best practice recommendations released by the Australian Stock Exchange (ASX) in March 2003, this study tests the relationship between initial public offering (IPO) firm performance and board governance quality, captured by board size, board leadership, board composition, and director"s share ownership. Based on a sample of Australian IPO firms that lodged prospectuses with ASX between 1994 and 1999, we do not find evidence that links underpricing to board structures at the time of IPO. IPO firms' board structures are insignificant in explaining the level of IPO underpricing, and board size is the only board governance variable significant in explaining long-run aftermarket performance, after controlling for the size of the firm. That is, IPO firms with larger boards at the time of issuance perform better in the long-run, consistent with the resource dependence theory. Thus, we conclude that ASX"s best practice recommendations are likely to distort the market-driven practices already in place, and our findings lead us to question the role played by the board of directors in signalling firm quality.