Board structure and survival of new economy IPO firms

Chancharat, Nongnit and Krishnamurti, Chandrasekhar and Tian, Gary (2012) Board structure and survival of new economy IPO firms. Corporate Governance: An International Review, 20 (2). pp. 144-163. ISSN 0964-8410

Abstract

Research Question/Issue: This study examines the relevance of currently accepted best practice recommendations regarding board structure on the survival likelihood of new economy initial public offering companies. We argue that industry context determines governance outcomes. Research Findings/Insights: We study 125 Australian new economy firms listed between 1994 and 2002. Each firm is tracked until the end of 2007 for monitoring their survival. We find that board independence is associated with an increase in the likelihood of corporate survival. We also find that the benefits of board independence increase at a decreasing rate. Theoretical/Academic Implications: The standard best practice recommendation of board independence stems from the monitoring role of directors and is based on agency theory. The results from our study suggest that the recommendation regarding board independence does not work well for new economy firms. While the agency theory based model implies a monotonic relation between board independence and performance, our research suggests that the relationship is nonlinear. This variation occurs because of increased monitoring costs faced by outsiders due to higher information asymmetry and complexity of new economy firms. Our empirical results suggest that inside directors play a complementary role to outsiders in mitigating firm failure. Practitioner/Policy Implications: Our research offers insights to policy makers who are interested in setting best practice standards regarding board structure. Our research suggests that firm/industry characteristics play a crucial role in determining the optimal board structure. In firms/industries where outsiders face significantly higher information processing costs, insiders can play a valuable complementary role to outsiders in enhancing the effectiveness of the board. Thus future hard or soft regulations related to board structure should consider industry context.


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Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Permanent restricted access to published version, due to publisher's copyright policy (Wiley-Blackwell).
Depositing User: Professor Chandrasekhar Krishnamurti
Faculty / Department / School: Historic - Faculty of Business and Law - School of Accounting, Economics and Finance
Date Deposited: 22 Jul 2012 06:51
Last Modified: 18 Jul 2014 04:35
Uncontrolled Keywords: corporate governance; board structure; survival analysis; new economy firms; informational asymmetry
Fields of Research (FOR2008): 15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance
15 Commerce, Management, Tourism and Services > 1503 Business and Management > 150303 Corporate Governance and Stakeholder Engagement
14 Economics > 1403 Econometrics > 140303 Economic Models and Forecasting
Socio-Economic Objective (SEO2008): E Expanding Knowledge > 97 Expanding Knowledge > 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
Identification Number or DOI: doi: 10.1111/j.1467-8683.2011.00901.x
URI: http://eprints.usq.edu.au/id/eprint/20669

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