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

• Date: 01 March 2014
• Published date: 01 March 2014
• Author: Silvio Vismara,Michele Meoli,Fabio Bertoni
• DOI: http://doi.org/10.1111/corg.12051

Board Independence, Ownership Structure and

the Valuation of IPOs in Continental Europe

Fabio Bertoni*, Michele Meoli, and Silvio Vismara

Manuscript Type: Empirical

Research Question/Issue: We combine the value-creation and value-protection views of the board of directors to study the

impact of board independence (BI) on the value of the f‌irm at the time of its initial public offering (IPO).

Research Findings/Insights: We conduct our analysis on a sample of 969 f‌irms that went public in France, Germany, and

Italy between 1995 and 2011. We show that BI is a critical factor in the valuation of IPO f‌irms. Our results support both the

value-creation and value-protection roles of the board of directors. The relative importance of the two roles of the board

varies over time, with value-creation (value-protection) dominating in IPOs of young (mature) companies.

Theoretical/Academic Implications: Our theoretical framework combines the agency and resource-dependence theories.

The impact of BI on IPO valuation depends on the importance of the value-creation and value-protection roles played by the

board. The change in the relative importance of the two roles determines a U-shaped relationship between BI and f‌irm age.

Corporate governance is particularly important for young and innovative f‌irms (where the resource-dependence theory

applies, and governance acts as a value-creation device), as well as for mature f‌irms and for companies where ownership

and control are separated (where the agency theory applies, and governance serves as a value-protection mechanism for

minority shareholders).

Practitioner/Policy Implications: We show that corporate governanceis a signif‌icant factor affecting the valuationof an IPO

company. The importance of BI varies substantially with the knowledge intensity of the industry, the separation between

ownership and control, and the age of the listing company.

Keywords: Corporate Governance, Board Composition, Shareholder Value, Agency Theory, Resource Dependence

Theory

INTRODUCTION

The contribution of the board of directors (BoD) to the

value of a company may be split along two dimensions.

First, an effective BoD protects suppliers of f‌inance from

managerial misbehavior, reducing the cost of, and facilitat-

ing access to, external capital. Second, the BoD may give the

company a competitive advantage by providing reputation,

a network of contacts, and strategic advice. Behind these

two dimensions lie two different theoretical perspectives

and two streams of literature that, only recently, have been

converging.

The f‌irst theoretical perspective is the agency view of the

BoD. According to this view, the BoD is a value-protection

device: the role of the BoD is to monitor the behavior of

managers by ensuring that they operate in the interests of

shareholders. A well-functioning BoD should determine

higher f‌irm valuation by inducing managers to exert more

effort and to restrain from extracting private benef‌its

(Hermalin & Weisbach, 2001). The second theoretical per-

spective is the resource-dependence view of the BoD.

According to this view, the BoD is a value-creation device:

the role of the BoD is to provide valuable resources to the

f‌irm, contributing to its competitive advantage. A well-

functioning BoD should determine higher f‌irm valuation by

giving strategic advice, contributing to the f‌irm’s reputation,

and expanding the f‌irm’s network of business contacts(Coff,

1999).

These two perspectives are not mutually exclusive, and

each BoD simultaneously performs both value-protection

and value-creation mechanisms. However, the relative

importance of the two roles varies across the life-cycle of the

f‌irm, with the value-creation function being dominant when

the f‌irm is young and the value-protection function taking

*Address for correspondence: Fabio Bertoni, EMLYON Business School, Research

Center on Entrepreneurial Finance (ReCEntFin), Department of Economics,

Finance and Control, 23 Avenue Guy de Collongue, 69134 Ecully, France.

E-mail: bertoni@em-lyon.com

116

Corporate Governance: An International Review, 2014, 22(2): 116–131

© 2014 John Wiley & Sons Ltd

doi:10.1111/corg.12051

the lead as the company matures (Filatotchev, Toms, &

Wright, 2006). The evolving impact of the BoD on f‌irm value

across the f‌irm’s life-cycle has relevant implications for the

empirical analysis of the relationship between value and

governance. However, this aspect has not received suff‌icient

attention in the academic literature, and the present work

aims to f‌ill this gap.

In this paper, we argue that the f‌irm characteristics mod-

erating the impact of board independence (BI) on f‌irm value

depend on the age of the company, ref‌lecting which function

of the BoD (i.e., value-creation or value-protection) domi-

nates. According to the resource-dependence view (which

dominates for young companies), BI is particularly impor-

tant in high-tech and innovative companies.According to the

agency view (which dominates for older companies), BI is

particularly important when minority shareholders are

exposed to the risk of expropriation.Age itself moderates the

impact of BI on f‌irm value, and it will have a different mar-

ginal effect depending on which function of the BoD domi-

nates. When the value-creation(or value-protection) function

is dominant, BI will increase in importance as the age of the

f‌irm decreases (or increases). As a result of the board’s

gradual switch from a value-creation to a value-protection

role, the impact of BI on the f‌irm’s valuation has a U-shaped

relationship with company age.

We study how BI affects f‌irm value across the life-cycle of

the f‌irm in a sample of 969 IPOs between 1995 and 2011 in

the three largest economies in continental Europe: France,

Germany,and Italy.IPOs are a particularly interesting unit of

analysis to study the effect of the dual natureof BoDs. At the

time of the IPO, the corporate governance of the f‌irm is

clearer than at any other point in the f‌irm’s history (Bruton,

Filatotchev, Chahine, & Wright, 2010). However, companies

may reach the IPO at different stages in their life-cycle, with

corresponding different dominant functions of the BoD. This

is particularly true in continental Europe, where the nature

of the f‌irms going public and the mechanisms to separate

ownership from control are more diverse than they are in

the United States (Ritter, 2003). These characteristics allow

us to study the role of BI across a broad spectrum of stages of

maturity and ownership structures of the listing companies.

Our work contributes to the literature in three ways. First,

we add to the IPO literature by showing that the contribu-

tion of BI to the IPO valuation is sizeable across the entire

life-cycle of the f‌irm. Second, we show that BI is not equally

important for all IPO f‌irms, but that some f‌irm characteris-

tics moderate its impact on valuation. The relevant moderat-

ing factors, however, depend on which function of the BoD

dominates, which is the third contribution of our paper. In

young companies, the impact of BI on f‌irm valuation is

higher when the f‌irm is younger and more innovative. In

mature companies, the impact of BI increases with age, and

it is particularly pronounced when ownership and control

are separated.

The rest of the paper is organized as follows. In the next

section, we brief‌ly review the literature and illustrate our

research hypotheses. In the following section, we illustrate

the methodology and sample used in this study. Next, we

report the results of our empirical analyses and discuss their

robustness. In the f‌inal section of the paper, we provide

some concluding remarks.

LITERATURE REVIEW AND HYPOTHESIS

DEVELOPMENT

IPO Valuation and Corporate Governance

The valuation of an IPO company is determined by many

factors. IPO valuation is inf‌luenced by numerous country-

specif‌ic institutional characteristics, including listing stan-

dards (Johan, 2010) and the quality and enforcement of

securities laws (Jackson & Roe, 2009; La Porta, Lopez-de-

Silanes, & Shleifer, 2006). Firm-specif‌ic characteristics inf‌lu-

encing IPO valuation include the listing f‌irm’s fundamentals

(Aggarwal, Bhagat, & Rangan, 2009; Kim & Ritter, 1999),

ownership structure (Meoli, Paleari, & Vismara, 2009; Yeh,

Shu, & Guo, 2008), prestige of the top management team

(Cohen & Dean, 2005; Pollock & Gulati, 2007), and academic

aff‌iliation (Bonardo, Paleari, & Vismara,2011). Finally, a very

important factor inf‌luencing the valuation of companies at

the IPO stage is the quality of their corporate governance

(Bell, Moore, & Filatotchev, 2012; Certo, 2003). Overall, the

empirical evidence is supportive of the existence of a posi-

tive link between corporate governancequality and the valu-

ation of IPO f‌irms.1Sanders and Boivie (2004) study a

sample of 183 publicly traded US internet f‌irms that went

public between 1993 and 1999. The valuation of these f‌irms

was strongly associated with several measures of corporate

governance, including BI. Chahine and Filatotchev (2008)

analyze 140 French IPOs from 1996 to 2000. They show that

BI was positively correlated with a higher valuation of the

company at the IPO. Using a sample of 251 IPOs in the

United Kingdom, Filatotchev and Bishop (2002) show that

by improving their corporate governance (including BI),

f‌irms can go public with less underpricing.

The evidence of a positive relationship between corporate

governance and IPO valuation is consistent with both the

value-creation and value-protectionroles played by the BoD.

The actual mechanism driving the inf‌luence of corporate

governance on IPO valuation, however, differs depending

on which of the two roles of the board dominates. According

to the resource-dependence view, corporate governance is

linked to higher valuation because f‌irms with better corpo-

rate governance have better access to valuable resources

(Coff, 1999). In contrast, the agency view argues that better

corporate governance is linked to higher valuation because

more of the potential value of the company is captured by its

shareholders, rather than extracted by managers or control-

ling shareholders (Dyck & Zingales, 2004). Interestingly,

although the two theories agree that corporate governance

matters, they produce different predictions about when it

matters most. In the next two sections, we will develop

distinct hypotheses on the importance of BI in IPO valuation,

based on the resource-dependence and agency theories.

IPO Valuation and Value-Creation by the Board

of Directors

The value-creation role of the BoD is dominant in young

companies (Filatotchev et al., 2006). Certo, Covin, Daily, and

Dalton (2001) argue that, in young organizations, the agency

view is not as prevalent as compared to mature f‌irms.

Instead, the resource-dependence view is dominant in

BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION 117

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