Board Stability And The Long-Term Performance Of Initial Public Offerings

IPO boards provide a unique opportunity to examine board stability and the effectiveness of board changes. This opportunity arises not only because of the ownership and managerial changes that occur in young firms, but also because of the documented average severe long-term underperformance of initial public offerings.We study the long-term stock performance of initial public offerings (IPOs). We examine how past performance affects the board of directors' stability and how changes in boards affect subsequent performance. We introduce a dynamic, scale invariant stability metric and cumulative wealth relative to measure such changes. Our results indicate that issuing firms during 1998-1999, substantialy underperformed a sample of matching firms in four-year period.These results indicate that the poorer initial performance is associated with greater board instability. Further adjusting boards that experience initial good performance is associated with continued success. We do not find evidence that removing ineffective board members leads to improvement in performance. Our findings suggest that adjustment for board members and size is preferable, since not only corporate governance itself but also regulatory authorities require.