Effects of founder CEO duality and board size on foreign IPOs’ survival in US markets

• DOI: https://doi.org/10.1108/CG-04-2021-0151
• Published date: 17 January 2022
• Date: 17 January 2022
• Pages: 1054-1077
• Subject Matter: Strategy,Corporate governance
• Author: Sang-Youn Lee,Eun-Jeong Ko

Effects of founder CEO duality and

board size on foreign IPOs’

survival in US markets

Sang-Youn Lee and Eun-Jeong Ko

Abstract

Purpose –This study aims to investigate how three critical governance decisions by foreign firms

impactedtheir survivability post-initial publicofferings (IPO): the choice of CEO (foundervs non-founder);

the power thefounder CEO wields relative to the board in terms of CEO duality; and boardsize.

Design/methodology/approach –This study usesdata from 86 foreign firms that completed IPOsin the

US market between 2000 and 2008and adopts a Cox proportional hazards model to examine howthe

founder,founder CEO duality and board size influence foreignfirm delisting post-IPO.

Findings –A founder CEO or a founder CEO with duality (i.e.when a founder CEO is also chair of the

board of directors) does not support a foreign firm’s survival post-IPO. Expectedly, board size has a

negative impact on post-IPO firm survivability; however, founder CEO duality positively moderates this

negative relationship.Therefore, founder CEO duality plays a positive indirectrole in the context of post-

IPO firms withlarge boards.

Originality/value –First, while the benefitsof CEO duality have been empirically ambiguous,this study

clarifies how founder CEOduality manifests its positive impacts in foreign listings. Second, by focusing

on board cognition, this studyconfirms the negative impact of large boards, but highlights that thiscan

be mitigated by governance leadership structure. Finally, despite organizational life-cycle theorists’

advocacy of the replacement of founder CEOs with professional CEOs in sizable ventures, this study

shows thebenefits of their retention when the boardis large.

Keywords Founder, CEO duality, Board size, Foreign IPO, Resource dependence,

Stewardship, Delisting

Paper type Research paper

Introduction

An increasing number of foreign ventures chooseUS stock exchanges for their initial public

offerings (IPOs) rather than exchanges in their home capital markets (Doidge et al., 2004)

because they believe that joining a large and attractive investment pool will enable them to

fully manifest their potential and maximizetheir capabilities. However, the failure rate is very

high for foreign firms listed on US exchanges. Recent research shows that 728 out of 1,330

foreign firms listed on major US exchangeswere involuntarily or voluntarily delisted between

1961 and 2004 (Chaplinsky and Ramchand, 2008). This high failure rate can be explained

by the high level of uncertainty associated with new IPOs (Certo et al., 2001;Lester et al.,

2006), which in turn increases vulnerability(O’Flaherty, 1984).

Uncertainty is higher for foreign IPO firms which must overcome “liabilities of foreignness”

(Zaheer, 1995)–costs of doing business abroad that result in competitive disadvantages,

broadly defined as all additional costs incurred by firms operating in overseas markets that

are not incurred by local firms. To overcome such “foreignness,” most IPO research has

focused on the relationship between initial conditions or characteristics of entrepreneurial

Sang-Youn Lee is based at

the Division of Business

Administration,

Sungkonghoe University,

Seoul, Republic of Korea.

Eun-Jeong Ko is based at

the Silberman College of

Business, Fairleigh

Dickinson University

College, Madison,

New Jersey, USA.

Received 19 April 2021

Revised 24 August 2021

6 November 2021

Accepted 23 December 2021

This work was supported by the

Sungkonghoe University

Research Grant of 2019.

PAGE 1054 jCORPORATE GOVERNANCE jVOL. 22 NO. 5 2022, pp. 1054-1077, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-04-2021-0151

firms when they go public and IPO underpricing and firms’ longer term success. However,

few have examined how a foreign firm’s governance structure influences performance and

survival in the post-IPO stage, eventhough going public is a transformational organizational

event requiring changes in governance and ownership structures, and extensive research

argues that the nature of governance mechanisms adopted by public firms highly

influences performance and outcomes(Jensen, 1986;Stulz et al.,1990;Walsh and Seward,

1990).

When transitioning to public ownership, entrepreneurial firms face three critical governance

decisions: the choice of CEO (founder vs non-founder), how much power the CEO has

relative to the board (Gao and Jain, 2012) and board size. First, in terms of the choice of

CEO (founder vs non-founder). Organizational life cycle theorists argue that once firms

reach a certain stage of development, founder CEOs should be replaced by professional

CEOs with experience in leading large corporations as founder CEOs may not have

adequate experiences and skill sets managing public companies (Adams et al.,2009;

Wasserman, 2003). In fact, in almost 60% of firms that go public, the founder is no longer

CEO at the time of IPO. Among founder CEOs at IPO, 50% are no longer CEO within three

years (Broughman and Fried, 2020).

On the other hand, agency theory maintains that, in modern corporations with widely held

share ownership, professional (i.e. non-founder) CEOs do not maximize shareholder returns

because of opportunism (Zeckhauser and Pratt, 1985). In agency theory terms, the owners

are principals and the managers (e.g.professional CEOs) are agents. When managers lead

corporations, shareholder returns decrease relative to when owners are in charge (Jensen

and Meckling, 1976). The establishment of this leadership structure is particularly important

at the time of IPO and immediately afterwards, as it is often the first time a venture

undergoes a significant change in ownership (from private to public) (Baker and Gompers,

2003;Engel et al.,2002). Therefore, one of the central corporate governance questions that

ventures face when going public is whether founders should be replaced by professional

CEOs as organizational life theorists argue, despite agency theorists’ concerns regarding

the agency conflicts plaguing establishedcorporations.

In addition to the decision regarding a founder vs non-founder CEO, thedecision regarding

the CEO’s power relative to that of the board of directors is another important governance

issue, as the board serves as a key governance structure, resource provider, and market

signal (Arthurs et al.,2008;Certo, 2003;Kroll et al.,2007;Walters et al.,2010). The resource

provision role of a board is critical for foreign listings, especially when their liability of

foreignness is prevalent, as members’ expertise and experience can reduce information

asymmetry between the management and the newly entered capital market. Therefore, the

CEO’s power and leadership –which can effectuate the board’s knowledge and cognitive

ability –is a salient issue. CEOs who are also board chairs have what is called “CEO

duality,” which implies stronger CEO power, whereas non-duality reflects weaker CEO

power (Finkelstein, 1992). Garg (2013) identified entrepreneurial ventures as a fruitful

empirical context for studying boards of directors. Yet, except for several early empirical

investigations of CEO duality in entrepreneurial contexts (Daily and Dalton, 1992), the

majority of research in this areahas focused on large, established corporations. To the best

of the authors’ knowledge, despite the interesting nature and characteristics that founders

may bring to the roles of CEO (Boeker, 1989;Wasserman, 2003) and a chairperson of the

board, few studies have focused on the impactof founder CEO duality on firm performance

post IPO, especially in the context of foreignIPO firms.

In addition to the division of labor between the board chair and the CEO (or lack thereof, in

cases involving CEO duality), the corporate governance literature normatively views board

size as an important aspect of a firm’s governance (Horner, 2013). Board size is a proxy of

human capital (Hillman and Dalziel, 2003;Haynes and Amy, 2010) that provides resources

and expertise to a firm. In this regard, we review the impact of board size and how the

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