Board Structure and Survival of New Economy IPO Firms

Abstract

Manuscript Type: Empirical Research Question/Issue: This study examines the relevance of currently accepted best practice recommendations regarding board structure on the survival likelihood of new economy initial public offering companies. We argue that industry context determines governance outcomes. Research Findings/Insights: We study 125 Australian new economy firms listed between 1994 and 2002. Each firm is tracked until the end of 2007 for monitoring their survival. We find that board independence is associated with an increase in the likelihood of corporate survival. We also find that the benefits of board independence increase at a decreasing rate. Theoretical/Academic Implications: The standard best practice recommendation of board independence stems from the monitoring role of directors and is based on agency theory. The results from our study suggest that the recommendation regarding board independence does not work well for new economy firms. While the agency theory based model implies a monotonic relation between board independence and performance, our research suggests that the relationship is nonlinear. This variation occurs because of increased monitoring costs faced by outsiders due to higher information asymmetry and complexity of new economy firms. Our empirical results suggest that inside directors play a complementary role to outsiders in mitigating firm failure. Practitioner/Policy Implications: Our research offers insights to policy makers who are interested in setting best practice standards regarding board structure. Our research suggests that firm/industry characteristics play a crucial role in determining the optimal board structure. In firms/industries where outsiders face significantly higher information processing costs, insiders can play a valuable complementary role to outsiders in enhancing the effectiveness of the board. Thus future hard or soft regulations related to board structure should consider industry context.

SPACs: post-merger survival

“…This could be explained as stakeholders' commitment is seen as a tool to lower asymmetric information and moral hazard and that involvement increases the quality of initial acquisition. This is in agreement with findings at Chancharat et al (2012) who report higher survival rates for companies with higher level of managerial involvement. Similarly, higher involvement of underwriters and the size of underwriters syndicate positively impacts the survival likelihood as the larger network of investment banks means potentially more resources committed to the merger.…”

“…Strictly speaking this paper follows more closely on a string of unit IPO and IPO literature as Schultz (1993), Hensler, Rutherford and Springer (1997), , Bharba and Pettway (2003), Fama and French (2004), Carpentier and Suret (2011) and Chancharat, Krishnamurti, and Tian (2012) that examine how initial IPO characteristics determine survival of companies post-IPO. Espenlaub, Khurshed and Mohamed (2012) posit that the length and likelihood of survival have important implications for firm's stakeholders.…”

“…(2009) and Dimitrova (2012) are reporting that incentives of SPAC founders are aligned in a way to encourage them to execute merger. 19 Chancharat et al (2012) find that the management team has positive role on the survival likelihood. Lakicevic et al (2014) confirms that the increase in the number of members in SPAC team means higher merger likelihood.…”

Reasons for Delisting and Consequences: A Literature Review and Research Agenda

“…Chancharat et al . () find the same results in their study of Australian new‐economy listed firms, showing that firms with independent boards are associated with a higher probability of survival.…”

Board Independence, Ownership Structure and the Valuation of IPOs in Continental Europe

“…In line with prior research, we compute the Board Independence variable as the proportion of non‐executive members on the board, as reported in the IPO prospectus (Chancharat, Krishnamurti, & Tian, ; Kang, Cheng, & Gray, )…”