The best of both worlds: Can founder‐CEOs overcome the rich versus king dilemma after IPO?

Abstract

Research Summary: To prevent loss of control post‐IPO, founder‐CEOs can implement control‐enhancing mechanisms disconnecting ownership from voting rights. However, this decision places them in a rich versus king dilemma. If they choose to implement such mechanisms and secure the king position, they risk losing money at IPO. If they choose not to implement control‐enhancing mechanisms and adopt the rich position they risk losing control over the firm. We investigate theoretically and empirically the outcomes of this dilemma in a multi‐period setting (at IPO and post‐IPO). We found that the majority of founder‐CEOs who choose the king option recover initial wealth loss, and hence, they can reconcile the rich and king paths in the long‐run post‐IPO. Managerial Summary: Founder‐CEOs often use control‐enhancing mechanisms (CEMs), such dual class shares, pyramid control structures, and pact agreements, to maintain control over their IPO firms. In this study, we investigate the effects of these CEMs on firm value at IPO and post‐IPO using a unique hand‐collected dataset comprising all founder‐CEO led firms that went public on French regulated markets between January 1992 and December 2010. We found that most founder‐CEOs who use multiple CEMs leave considerable amounts of money on the table at IPO date but they are able to recover their initial loss 5 years post‐IPO. This result suggests that an IPO may constitute a valuable financing alternative even for founder‐CEOs who value control.

Legal Perception and Finance: The Case of IPO Firm Value

“…Our novel conceptualization of the legal signalling effect thus allows us to contribute both to the comparative IPO literature (Akyol et al, 2014;Engelen and van Essen, 2010) and the still ill-understood question of the role of law in financial markets (Cumming, Schmidt and Walz, 2010;Licht and Adams, 2019;Schnyder, Siems and Aguilera, 2018) by providing a more fine-grained understanding of how the law affects economic outcomes in a comparative context. It also extends Mike Wright's research on entrepreneurial finance in the international context (Cumming et al, 2019;Estrin et al, 2019;Meuleman et al, 2017), institutional theory development (Fini et al, 2017;Hoskisson et al, 2013;Wood, Phan and Wright, 2018), IPOs and corporate governance (Chahine et al, 2019;Fattoum-Guedri, Delmar and Wright, 2018;Filatotchev, Wright and Bruton, 2017) and the increasing internationalization of financial markets Wright, 2013, 2015), to whom the special section on entrepreneurial finance in which this paper features is dedicated.…”

The organizational design of entrepreneurial ventures

“…For example, Wasserman () carefully chronicled a set of dilemmas that founders face in deciding to launch a venture, build a team, and attract stakeholders. A handful of studies have examined traditional constitutive elements of organizational design, such as organizational structure (Ferguson, Cohen, Beckman and Burton, Sørensen, & Dobrev, ), hierarchy (Colombo & Grilli, ), task allocation (Jung, Vissa, & Pich, ; Katila, Thatchenkery, Christensen, & Zenios, ), functional specialization (Beckman & Burton, ), role formalization (Mathias & Williams, ; Sine, Mitsuhashi, & Kirsch, ), decision rights (Hellmann and Wasserman, ; Fattoum‐Guedri, Delmar, & Wright, ; Souitaris, Zerbinati, Peng, & Shepherd, ), and the adoption of managerial practices (Cardon & Stevens, ; Feldman, Ozcan, & Reichstein, ). As two recent literature reviews reveal, the empirical evidence on the antecedents and consequences of organizational design choices in entrepreneurial ventures is both limited and mixed and there is still much to be learned (Colombo, Rossi‐Lamastra, & Matassini, ; DeSantola & Gulati, ).…”

On the organizational design of entrepreneurial ventures: the configurations of the entrepreneurial team

“…Much of what is known about the internal organization of firms is based on the study of large established organizations. Only a handful of studies have gone to the core of the constitutive elements of the internal organization of EVs, such as organizational structure (Ferguson et al 2016), hierarchy (Colombo and Grilli 2013), task allocation (Jung et al 2017;Katila et al 2017), functional specialization (Beckman and Burton 2008;Haeussler et al 2019), role formalization (Mathias and Williams 2018;Sine et al 2006), and the allocation of decision rights (Fattoum- Guedri et al 2018;Hellmann and Wasserman 2016;Hellmann et al 2019;Souitaris et al 2019). Recently, the Special Issue on the Strategic Entrepreneurship Journal by Burton et al (2019) stimulated new research in this realm.…”

“…Since the SPEC project (e.g., Baron et al 1999b; Baron et al 1996), only few papers provided robust quantitative empirical evidence on EVs' specific organizational design elements (e.g., Beckman and Burton 2008;Colombo and Grilli 2013;Fattoum-Guedri et al 2018;Ferguson et al 2016;Haeussler et al 2019;Hellmann and Wasserman 2016;Hellmann et al 2019;Jung et al 2017;Katila et al 2017;Mathias and Williams 2018;Sine et al 2006;Souitaris et al 2019). These studies, however, have often undertook a "silo approach"-i.e., they have studied different organizational design elements in isolation.…”