The Impact of Board Structure on IPO Underpricing

Prior research has examined the impact of board structure on firm performance and found that characteristics such as board size affect both operating and stock price performance. Existing research has concentrated primarily on performance in periods well removed from a firm’s initial public offering (IPO), and relatively little research has examined the impact of board structure on the stock price performance of IPOs, particularly with regard to characteristics other than board size. This study fills this gap, finding that the key board characteristic is the percentage external directors on the board. The authors find that the greater the percentage of external board members, the lower the firm’s underpricing or initial return. This result is particularly pronounced for firms with venture capital backing, suggesting that VCs provide certification value, although primarily when they have a deep involvement in the issuing firm.