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1 The Internatonal Journal of Accountng Studes ( ) IPOs 405 IPOs IPOs IPOs

2 98 The Relaton of Mandatory Set-Up of Independent Drector and Supervsor wth IPOs Underprcng Che-Chang Chou Department of Accountng Natonal Changhua Unversty of Educaton Yu-Ren Zhang Department of Internatonal Busness Mnghsn Unversty of Scence and Technology L-Hsueh Kuo Department of Busness Affars Natonal FengYuan Senor Commercal Vocatonal Hgh School Abstract Wth a sample of 405 ntal publc offerngs (IPOs) n Tawan Stock Exchange, ths paper emprcally nvestgates whether the mandatory set-up of ndependent drectors and supervsors help explan the magntude of IPOs underprcng. The results show that there s a negatve and sgnfcant correlaton between the engagement of ndependent drectors and the underprcng of IPOs. However, the relaton between the engagement of ndependent supervsors and the underprcng of IPOs s uncertan. In addton, the proporton of ndependent drectors wth CPA background to all drectors and the number of ndependent supervsors havng CPA backgrounds do not sgnfcantly affect the underprcng of IPOs. Keywords: Independent drectors, Independent supervsors, IPOs underprcng, Informaton asymmetry theory. Submtted February 2005 Accepted December 2007 After 3 rounds of revew

3 99 1 ntal publc offerngs IPOs underprcng 2 nformaton asymmetry 3 Baron 1982 Chua 1995 Bae and Levy Rock 1986 Beatty and Rtter 1986 wnner s curse Grnblatt and Hwang 1989 Allen and Faulhaber 1989 Welch (1989) Chemmanur sgnalng theory 5 Leland and Pyle 1977 Grnblatt and Hwang 1989 Allen and Faulhaber 1989 Welch 1989 Carter and Manaster 1990 Paul and Josh Beatty 1989 Menon and Wllams 1991 James and Wer IPOs % 5% 8% 12% 167% Jog 1997 A 289% Mok and Hu % Bae and Levy Leland and Pyle 1977

4 100 agency problem agency cost /27 / 2003/12/29 7 1/

5 Enron 14 7 IPOs IPOs Solomon, Ln, Norton and Solomon

6 102 IPOs 11 Morck Shlefer and Vshny /27 / 2003/12/24

7 103 SARS SARS IPOs McBan and Krause 1989 Hggns and Gulat 1999 Certo, Covn, Daly and Dalton 2001 Flatotchev and Bshop 2002 Hggns and Gulat 1999 Flatotchev and Bshop 2002 nonexecutve afflaton Certo et al ( ) ( ) Certo et al Hggns and Gulat 1999 Certo et al Flatotchev and Bshop 2002 Leuz, Nanda and Wysock

8 104 IPOs ( ) ( ) ( ) ( )

9 105 Fama and Jensen 1983; Morck et al Cochran, Wartck and Wood 1984 Mehran 1995 ( ) Grnblatt and Hwang 1989 Allen and Faulhaber 1989 ( ) Barnea, Haugen and Senbet (1980) Patton and Baker 1987 Zahra and Pearce II 1989 Pfeffer and Salanck 1978 Fama and Jensen 1983 Morck et al. (1988) Huson, Parrno and Starks (2001) Sngh and Davdson III 2003

10 106 Beasley 1996 ( ) 16 Grnblatt and Hwang 1989; Allen and Faulhaber 1989 Rosensten and Wyatt 1990 Byrd and Hckman % McBan and Krause 1989 IPOs Certo et al IPOs nonexecutve drectors Hggns and Gulat 1999 Provan 1980 IPOs Flatotchev and Bshop 2002 IPOs IPOs IPOs % 64% 61% /11 / 2003/10/05

11 107 H1 IPOs IPOs H2 IPOs H3 IPOs Fama and Jensen 1983 Morck et al. (1988) Beasley 1996 刄 Fama and Jensen 1983 Beasley 1996 Federal Depost Insurance Corporaton Cochran et al Mehran 1995 Porter and Gendall 1998 Kalbers and Fogarty 1993 Beasley, Carcello, Hermanson and Lapdes 2000 Ransbury 2004 McDanel, Martn and Manes 2002 Ransbury 2004 BRC Blue Rbbon Commttee 1999 Sarbanes-Oxley Act 2002 Mchgan Busness Corporaton Act 1989 NZX New Zealand Exchange rules 2003

12 Flatotchev and Bshop 2002 IPOs external contacts Flatotchev and Bshop 2002 IPOs IPOs IPOs H

13 109 Yeh, Lee and Wodtke Beasley et al Kalbers and Fogarty 1993 Ransbury 2004 IPOs IPOs H5 UP 5 = a0 + a1idd + a2 IDS + a3iddcpa + a4 IDSCPA + a LNASSET + a6 DIRECTOR + a7manager + a8largeholder + a9 + a10 FOREIGN + a11de + a12uwep + a13cpar + a14 LB + a15 + a16 EXCHG + a17 DEP + a18 RATIO + a19 BULL + a20 DISTR + a21 + a INDU + a23 FAGE + ε OTHERINST LBDOLLAR IPOSIZE 22 (1) 1 1. UP 2003 Flatotchev and Bshop 2002 Chemmanur and Paegls 2005

14 110 UP = P P 1 P 0 0 P 1 P $38 $35.4 P 1 $35.4 P 0 $38 2. (1) IDD IDS IPOs IPOs IPOs IDD / IDDCPA IDDCPA = / IDSCPA (2) LNASSET Logue 1973

15 111 Chemmanur and Paegls 2005 IPO 18 DIRECTOR MANAGER LARGEHOLDER Leland and Pyle 1977 Keasey and McGunness 1992 Flatotchev and Bshop % OTHERINST FOREIGN Certo et al Flatotchev and Bshop 2002 DE James and Wer / UWEP Nueberger and La Chapelle IPOs 18 Chemmanur and Paegls 2005 IPOs

16 112 Chemmanur and Paegls IPOs CPAR Beatty 1989 Menon and Wllams LB LBDOLLAR EXCHG (2003) 1 0 DEP (2003) (2003) IPOs RATIO Ln and Fok (1997) BULL Ln and Fok 1997 (2003) IPOs BULL = I I 1 I

17 113 I 1 I 0 DISTR IPOs aucton fxed prce Benvenste and Wlhelm IPOs IPOs IPOSIZE IPOs Baron and Holmstrom IPOs IPOs IPOs INDU 2003 IPOs 1 0 FAGE IPOs Certo et al. 2001; Flatotchev and Bshop 2002 IPO Rtter 1998 IPO Certo et al ( ) IPOs IPOs

18 /2/ /2/ % 23% 32% 24% 1 様 % (44) 5 1.2% (45) % 8 3 (46) 1 0.3% (41,43,47,51,65) % 19 8 (50) 4 1% (51) 4 1% ,24,30(32,49,52,54,61,62,66,80) % (55) % 9 1 (56) 2 0.5% 2 0 (57) 1 0.3% 1 0 (59) 2 0.5% (89) % ( )

19 t Mann-Whtney t=8.488 p<0.01 z=6.329 p<0.01 H1 IPOs IPOs IPOs vs. t Mann-Whtney t p z p UP *** *** UP UP=(P 1 -P 0 )/P 0 P 1 P *** ** * p ( ) 1. 1 UP IDD IDS IPOs IDDCPA

20 116 IDSCPA LNASSET DE UWEP CPAR LB DEP EXCHG RATIO BULL DISTR 0 IPOs IPOs IPOSIZE IDD IDS p<0.01 IDDCPA p<0.05 IDSCPA p<0.05 p<0.05 Rock p< p<0.01

21 117 Ln and Fok (1997) multcollnearty varance nflaton factors VIF 3. (1) H2 H3 1 VIF VIF 10 Klebaum, Kupper and Muller 1988 VIF VIF 3 IDD p<0.001 IPOs H % IDS p<0.001 IPOs H % IDD p<0.01 IDS p> %

22 118

23 119 UP IDD IDS IDDCPA IDSCPA LNASSET DIRECTOR MANAGER LARGEHOLDER UP IDD -.293*** IDS -.28***.904*** IDDCPA -.123**.372***.39*** IDSCPA -.122**.323***.389***.208*** LNASSET *** -.144*** DIRECTOR *** MANAGER ***.108** LARGEHOLDER ***.18*** OTHERINST ** ***.321*** -.439***.347*** FOREIGN **.11** DE.12** -.123** -.108** *** ** UWEP **.187*** *** CPAR **.14*** LB.102** -.159*** -.136*** *** LBDOLLAR *** ***.043 DEP *** *** EXCHG *** *** RATIO -.311***.166***.159*** *** BULL DISTR ** *** IPOSIZE ***.174*** *** INDU *** FAGE ** Welch (1989)

24 120

25 121 1 (2) H4 H5 IDDCPA p>0.1 H4 Flatotchev and Bshop 2002 IPOs Fama and Jensen 1983 H5 22 WDCPA p>0.1 H5 22

26 122 (3) LNASSET UP DIRECTOR MANAGER LARGEHOLDER OTHERINST FOREIGN DE p<0.01 Rock UWEP p<0.1 Nueberger and La Chapelle IPOs CPAR LB (DEP) LBDOLLAR p< EXCHG p< RATIO p<0.01 Ln and Fok (1997) BULL p<0.05 Ln and Fok 1997 (2003) IPOs IPOs DISTR IPOs IPOSIZE INDU p<0.05 IPOs 2003 FAGE

27 123 n=405 UP = a0 + a1idd + a2ids + a3iddcpa + a4 IDSCPA + a5lnasset + a6 DIRECTOR + a7manager + a8largeholder + a9 + a10 FOREIGN + a11de + a12uwep + a13cpar + a14 LB + a15 + a16 EXCHG + a17 DEP + a18 RATIO + a19 BULL + a20 DISTR + a21 + a22 INDU + a23 FAGE + ε OTHERINST LBDOLLAR IPOSIZE p p p Constant ** ** ** IDD *** *** IDS *** IDDCPA IDSCPA LNASSET DIRECTOR MANAGER E LARGEHOLDER OTHERINST FOREIGN DE? *** *** *** UWEP * * * CPAR LB LBDOLLAR -1.49E ** -1.48E ** -1.50E ** EXCHG ** ** ** DEP RATIO *** *** *** BULL ** ** ** DISTR IPOSIZE 1.34E E E INDU ** ** ** FAGE Adjusted R F *** *** *** ~2003 t Whte 1980 VIF VIF 3 *** ** * p

28 robustness UP =(P 1 -P 0 )/P 0 UP a = (P 1 -P 0 )/P 0 -(I 1 -I 0 )/I 0 SARS SARS SARS SARS 24 p<0.05 SARS IPOs

29 125 SARS SARS IPOs McBan and Krause 1989; Hggns and Gulat 1999; Certo et al. 2001; Flatotchev and Bshop 2002 Hggns and Gulat 1999 Flatotchev and Bshop 2002 nonexecutve afflaton Certo et al ( ) ( ) IPOs IPOs

30 126 UPa = a0 + a1idd + a2 IDS + a3iddcpa + a4 IDSCPA + a5 + a6 DIRECTOR + a7manager + a8largeholder + a9 + a10 FOREIGN + a11de + a12uwep + a13cpar + a14 LB + a15 + a16 EXCHG + a17 DEP + a18 RATIO + a19 DISTR + a20 + a 21 INDU + a 22 FAGE + ε LNASSET OTHERINST IPOSIZE LBDOLLAR p p p Constant ** ** ** IDD *** *** IDS *** IDDCPA IDSCPA LNASSET DIRECTOR MANAGER E LARGEHOLDER E OTHERINST FOREIGN DE? *** *** *** UWEP * * * CPAR LB LBDOLLAR -1.50E ** -1.48E ** -1.51E ** EXCHG ** ** *** DEP RATIO *** *** *** DISTR IPOSIZE 1.38E E E INDU ** ** ** FAGE Adjusted R F *** *** *** ~2003 t Whte 1980 *** ** * p

31 127 SARS p p p Constant ** ** ** IDD ** *** IDS ** *** IDDCPA IDSCPA LNASSET DIRECTOR MANAGER -4.63E LARGEHOLDER 5.20E E OTHERINST FOREIGN DE? *** ** *** UWEP * * * CPAR LB LBDOLLAR -1.46E ** -1.43E ** -1.46E ** EXCHG ** ** *** DEP RATIO *** *** *** BULL ** ** ** DISTR IPOSIZE 1.47E E E INDU ** ** ** FAGE Adjusted R F *** *** *** ~2003 t Whte 1980 *** ** * p afflaton drectors

32 128 non-afflaton drectors Enron Patton and Baker 1987 ; Glson 1990 ; Shvdasan 1993 Shvdasan 1993 NYSE 74% Enron Gordon 2002 / Sarbanes-Oxley Act of 2002 Enron (1) (2) (3) (4) (5) (6) (7)

33 vs IPO IPO Ohlson

34 Allen, F., and G. R. Faulhaber Sgnalng by under-prcng n the IPO Market. Journal of Fnancal Economcs 23(August): Bae, S. C., and H. Levy The valuaton of frm commtment underwrtng contracts for seasoned new equty ssues: Theory and evdence. Fnancal Management 19(Summer): Barnea, A., R. A. Haugen, and L. W. Senbet A ratonale for debt maturty structure and call provsons n the agency theoretcal framework. Journal of Fnance 35(December): Baron, D. P A model of the demand for nvestment bankng advsng and dstrbuton. Journal of Fnancal Economcs 37(September): Baron, D. P., and B. Holmstrom The nvestment bankng contract for new ssues under asymmetrc nformaton: Deregulaton and the ncentve problem. Journal of Fnance 35(December): Beasley, M. S An emprcal analyss of the relaton between the board of drector composton and fnancal statement fraud. The Accountng Revew 71(October): Beasley, M. S., J. V. Carcello, D.R. Hermanson, and P. D. Lapdes Fraudulent fnancal reportng: Consderaton of ndustry trats and corporate governance mechansms. Accountng Horzons 14(December): Beatty, R. P Audtor reputaton and the prcng of ntal publc offerng. The Accountng Revew 64(October): Beatty, R. P., and J. R. Rtter Investment bankng, reputaton, and the underprcng of ntal publc offerngs. Journal of Fnancal Economcs 15(January-February): Benvenste, L. M., and W. J. Wlhelm A comparatve analyss of IPO proceeds under alternatve regulatory envronments. Journal of Fnancal Economcs 28(November-December):

35 131 Blue Rbbon Commttee (BRC) Report and recommendatons of the Blue Rbbon Commttee on mprovng the effectveness of Blue Rbbon Commttee. New York Stock Exchange and Natonal Assocaton of Securtes Dealers. Byrd, J., and K. Hckman Do outsde drectors montor managers? Evdence from tender offer bds. Journal of Fnancal Economcs 32(October): Carter, R., and S. Manaster Intal publc offerngs and underwrter reputaton. Journal of Fnance 45(September): Certo, T. S., J. G. Covn, C. M. Daly, and D. R. Dalton Wealth and the effects of founder management among IPO-stage new ventures. Strategc Management Journal, Specal Issue 22(June-July): Chemmanur, T. J The prcng of ntal publc offerng: A dynamc model wth nformaton producton. Journal of Fnance 48(March): Chemmanur, T. J., and I. Paegls Management qualty, certfcaton, and ntal publc offerngs. Journal of Fnancal Economcs 76(May): Chua, L A re-examnaton of the costs of frm commtment and best efforts IPOs. Fnancal Revew 30(May): Cochran, P. L., S. L. Wartck, and R. A. Wood The average age of boards and fnancal performance, revsted. Quarterly Journal of Busness & Economcs 23(Autumn): Fama, E. F., and M. C., Jensen Separaton of ownershp and control. Journal of Law and Economcs 26(June): Flatotchev, I., and K. Bshop Board composton, share ownershp, and underprcng of U.K. IPO frms. Strategc Management Journal 23(October): Glson, S. C Bankruptcy, boards, banks, and blockholders: Evdence on changes n corporate ownershp and control when frms default. Journal of Fnancal Economcs 27(October): Grnblatt, M., and C. Y. Hwang Sgnalng and the prcng of new ssues. Journal of Fnance 44(June): Gordon, J. N What Enron means for the management and control of the modern busness corporaton: Some ntal reflectons, Workng Paper No <

36 132 Hggns, M. C., and R. Gulat Gettng off to a start: The effects of upper echelon afflatons on prestge of nvestment bank and IPO success. Workng Paper, Harvard Busness School. Huson, M., R. Parrno, and L. Starks Internal montorng mechansms CEO turnover: A long term perspectve. Journal of Fnance 56(December): James, C., and P. Wer Borrowng relatonshp, ntermedaton, and the cost of ssung publc securtes. Journal of Fnancal Economcs 28 (November- December ): Jog, V The clmate for Canadan ntal publc offerngs. In: Halpern, P., (Ed) Fnancng Growth n Canada, Unversty of Calgary Press: Kalbers, L. P., and T. J. Fogarty Audt commttee effectveness: An emprcal nvestgaton of the contrbuton of power. Audtng: A Journal of Practce and Theory 12(Sprng): Keasey, K., and P. McGunness An emprcal nvestgaton of the role of sgnalng n the valuaton of unseasoned equty ssues. Accountng and Busness Research 86(Sprng): Klebaum, D. G., L. L. Kupper, and K. E. Muller Appled Regresson Analyss and Other Multvarate Methods. 2 d ed. Boston, Mass: PWS-Kent, 210. Leland, H. E., and D. H. Pyle Informaton asymmetres, fnancal structure and fnancal ntermedaton. Journal of Fnance 32(May): Leuz, C., D. Nanda, and P. D. Wysock Earnngs management and nvestor protecton: An nternatonal comparson. Journal of Fnancal Economcs 69(September): Ln, T. H., and R. C. W. Fok The nformaton content of IPO prce adjustment. Internatonal Journal of Fnance 52: Logue, D On the prcng of unseasoned equty ssues. Journal of Fnancal and Quanttatve Analyss 8(January): McBan, M. L., and D. S. Krause Gong publc: The mpact of nsder s holdngs on the prce of ntal publc offerng. Journal of Busness Venturng 4(November): McDanel, L., R.D. Martn, and L. A. Manes Evaluatng fnancal reportng qualty: The effects of fnancal expertse vs. fnancal lteracy. The Accountng Revew, Supplement 77(Supplement):

37 133 Mehran, H Executve compensaton structure, ownershp, and frm performance. Journal of Fnancal Economcs 38(June): Menon, K., and D. D. Wllams Audtor credblty and ntal publc offerngs. The Accountng Revew 66(Aprl): Mchgan Busness Corporaton Act < documents/mcl/pdf/mcl-act-284-of-1972.pdf>. Mok, H. M. K., and Y. V. Hu Under-prcng and aftermarket performance of IPOs n Shangha, Chna. Pacfc-Basn Fnance Journal 6(November): Morck, R., A. Shlefer, and R. W. Vshny Management ownershp and market valuaton: An emprcal analyss. Journal of Fnancal Economcs 20 (January -March): New Zealand Exchange Lmted NSX lstng rule amendments: Corporate governance.< changes corpgov.pdf>. Nueberger, B. M., and C. A. La Chapelle Unseasoned new ssue prce performance on three ters: Fnancal Management 12(Autumn): Patton, A., and J. C. Baker Why do not drectors rock the boat? Harvard Busness Revew 65(November-December): Paul, G., and L. Josh Conflct of nterest n the ssuance of publc securtes: Evdence from venture captal. Journal of Law and Economcs 42(Aprl): Pfeffer, J., and G. R. Salanck The External Control of Organzatons: A Resource-Dependence Perspectve. New York: Harper & Row. Porter, B. A., and P. J. Gendall Audt commttees n prvate publc sector corporates n New Zealand: An emprcal nvestgaton. Internatonal Journal of Audtng 2(March): Provan, K Board power and organzatonal effcency among human servce agences. Academy of Management Journal 23(June): Ransbury, E Audt commttee membershp- A New Zealand perspectve. Pacfc Accountng Revew 16(December): Rtter, J. R Intal publc offerngs. Contemporary Fnance Dgest 2: Rock, K Why new ssues are underprced. Journal of Fnancal Economcs 5(January-February):

38 134 Rosensten, S., and J. Wyatt Outsde drectors, board ndependence and shareholder wealth. Journal of Fnancal Economcs 26(August): Sarbanes-Oxley Act of Washngton D. C. Congress. < house. gov/reports/107/h3763.pdf>. Sngh, M., and W. N. Davdson III Agency costs, ownershp structure and corporate governance mechansms. Journal of Bankng and Fnance 27(May): Shvdasan, A Board composton, ownershp structure, and hostle takeovers. Journal of Accountng and Economcs 16(January-July): Solomon, J. F., S. W. Ln, S. D. Norton, and A. Solomon Corporate government n Tawan: Emprcal evdence from Tawanese company drectors. Corporate Governance 11(July): Welch, I Seasoned offerng, mtaton costs, and the under-prcng of ntal publc offerngs. Journal of Fnance 44(June): Whte, H A heteroscedastcty-consstent covarance matrx estmator and drect test for heteroscedastcty. Econometrca 48(May): Yeh, Y. H., T. S. Lee, and T. Wodtke Famly control and corporate governance: Evdence for Tawan. Internatonal Revew of Fnance 2(March-June): Zahra, S. A., and J. A. Pearce II Boards of drectors and corporate fnancal performance: A revew and ntegratve model. Journal of Management 15(June):

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