Market Valuation and Employee Stock Options

Zhang, Ge

doi:10.2139/ssrn.326220

Cited by 8 publications

(1 citation statement)

References 57 publications

(33 reference statements)

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“…Founder-CEOs who are granted stock options at the IPO may be seen as opportunistic managers ( Zhang, 2006 ), using the options to generate gains that off set the wealth loss from underpricing due to their pre-IPO ownership. However, with large option awards, this might be counteracted because a low option price would provide the executive with high levels of future gains due to the increase of the share price immediately aft er the fl otation.…”

Section: Share Options Granted At the Point Of The Ipo Flotationmentioning

confidence: 99%

Corporate Governance in IPOs

Filatotchev

Allcock

2013

Oxford Handbooks Online

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corporate governance in ipos 423 investors ( Bruton et al., 2010 ). An entrenched founder-CEO may also try to retain a leadership position even when his/her skills become inadequate to new challenges faced by the fi rm ( Nelson, 2003 ). As a result of these information asymmetries, there are potential agency costs when a fi rm experiences an IPO since managers may not reveal actions within the fi rm or do not take certain actions that maximize the fi rm benefi t ( Sanders and Boivie, 2004 ).At IPO investors recognize the potential impact of the agency costs associated with information asymmetries, and they will therefore anticipate potential agency costs and price-protect themselves, thus leading to an IPO discount. Prior research approximates this discount by a lower industry-adjusted off er price/book or price/sales ratios (e.g. Chahine and Filatotchev, 2008 ), while others associate it with greater underpricing, measured by the diff erence between the fi rst-day-trading closing price and the off er price (e.g. Daily et al., 2003 ), suggesting that the aft ermarket price provides a good proxy for an intrinsic value of the IPO fi rm. Some researchers, however, argue that the uncertainties and information asymmetries cannot be resolved on the fi rst day of trading, and suggest using longer-term proxies for the stock market discount ( Aggarwal and Rivoli, 1990 ; Loughran et al., 1994 ).However, the IPO team may use corporate governance-related signals that allow potential investors to better understand the true value of the fi rm and reduce risks of agency problems, which in turn can improve the IPO fi rm's performance ( Sanders and Boivie, 2004 ). Corporate governance studies in the IPO context have recognized a wide range of potential "good governance signals" that include board characteristics, executive incentives, and the governance roles of early stage investors. Th ese governance factors play a dual role in addressing two types of agency confl icts in an IPO fi rm. First, they may convey important signals about the "quality" of IPO fi rm, and this may reduce the extent of adverse selection problems. For example, by attracting prestigious and experienced independent board members, an IPO fi rm can diff erentiate itself from other "poor quality" IPOs. At the same time, these independent directors may improve the extent and quality of monitoring, which imposes constraints on managerial discretion and reduces moral hazard-type agency confl icts. Likewise, venture capitalist may play important certifi cation and monitoring roles that aff ect both types of agency confl icts. By carefully selecting their investment targets, they certify the quality of fi rms they bring to the stock market. In addition, venture capitalists (VCs) oft en retain their ownership aft er the fl otation, and their objectives and post-issue monitoring incentives may be aligned with public market investors ( Bruton et al., 2010 ).A central premise of this research is that corporate governance factors may be important signals to investors w...

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Section: Share Options Granted At the Point Of The Ipo Flotationmentioning

confidence: 99%