Detrimental effects of post-IPO corporate governance changes: The case of young entrepreneurial firms

Abstract

Purpose

The authors contend that immediately following the initial public offering (IPO), the new owners that replace the original ones are likely to request changes in two corporate governance mechanisms, board of directors and top management teams (TMTs). Following these alterations, the purpose of this paper is to propose that such changes will be detrimental for the performance of young entrepreneurial firms.

Design/methodology/approach

This study examines the post-IPO governance changes in young entrepreneurial firms. The sample consists of 185 companies that went public between 2001 and 2005. A hierarchical linear regression approach with the appropriate control variables is adopted to test the proposed hypotheses.

Findings

The results revealed that, following the changes in ownership structure post-IPO, changes are observed in one of the corporate governance mechanisms the authors considered, boards of directors, but not TMTs. Consistent with the general theme of this study, the authors also observed a negative impact of changes in boards of directors on subsequent firm performance; this was not the case with TMTs.

Research limitations/implications

Contrary to the fundamental contentions of agency theory, the results highlight the need for adopting a different approach for young entrepreneurial firms.

Practical implications

The findings highlight the importance of preserving the entrepreneurial efficacy of young entrepreneurial firms.

Originality/value

This paper challenges the fundamental contentions of agency theory in the case of young entrepreneurial firms. The results demonstrate that post-IPO shareholders’ interference with the governance mechanisms results in lower performance.

Citation

Atinc, G., Kroll, M. and Walters, B. (2017), "Detrimental effects of post-IPO corporate governance changes: The case of young entrepreneurial firms", Management Decision, Vol. 55 No. 2, pp. 234-247. https://doi.org/10.1108/MD-02-2016-0084