Learning and Teaching Unit
Lin, Michelle 2006, Initial public offerings and board governance: An Australian study, PhD thesis, University of Western Australia, School of economics and commerce.
Problem/issue: Appropriate corporate governance structures for publicly listed companies has been the subject of much debate. In March 2003, the Australian Stock Exchange (ASX) released new corporate governance guidelines, which included “best practice” recommendations such as the adoption of an independent board and separation of the roles of chairperson and CEO. ASX listed companies are obliged to follow the recommendations or explain their non compliance. Compliance is impractical and costly, particularly for small companies.
Field of literature: Corporate governance
‘Gap’ in the literature: While a number of review and reports have been released stipulating 'best practice' in corporate governance, there has been little empirical testing of the recommendations against actual market outcomes. In particular, while investors perceptions about best practice have been the subject of survey, there is little empirical data to confirm their actual behaviour. In addition, most studies about board structure have been static, neglecting consideration of board structures over time.
Question: Do firms which conform to the ASX's principles and recommendations have better outcomes, as measured in terms of investors behaviour, than firms who do not?
In order to understand the relationship between board structure and firm outcomes the study statistically assesses the relationship between board structure, captured as board composition, leadership, size and share ownership of directors, and initial public offerings (IPO) underpricing, post IPO long-run performance, and subsequent equity offerings. The sample consists of Australian firms who made an IPO between 1994 and 1999. Data was sourced from firm prospectuses between 1994 and 1999, and Connect 4 data base checked against “Additions to the official list” of the ASX fact book. Further, we analyse changes in IPO firms’ board structures from the time of listing to five years later to determine whether IPO firms adopt governance structures that are more in line with the best practice recommendations after listing as well as whether the changes are related to IPO firms’ long-run performance.
Overall, we find that the majority of successful firms did not conform to the “optimal” board structures recommended by the ASX in either the short or long term. IPO firms’ board structures are found to be unrelated with the level of IPO underpricing, post IPO long run performance, and subsequent equity offerings.
There is little evidence to support the view that firms who comply with ASX board structure recommendations are more successful than those that do not. 'Thus, our findings lend support to the view that the ASX recommendations on corporate governance are excessively prescriptive and unduly costly for small companies in particular. The ASX is no less likely to achieve the expected benefits from adoption of its recommendations, but will substantially reduce companies' compliance costs in aggregate, if it allowed a blanket exemption based on firm size'.
