Family Firms' Corporate Governance And IPO 'Underpricing' In China

As a widely existing form of business organization, family firms are an integral part of China's private economy. The main research purpose of the paper is to find out the difference in IPO underpricing level between family firms and non-family firms and the impact of non-family CEO and percentage of family directors in the board on the IPO underpricing level.According to the information asymmetry theory, the information asymmetry between issuers and investors is the critical factor that influences the IPO underpricing. The greater the ex-ante uncertainty of the new stock, the higher the level of IPO underpricing. The principal agent problem can be alleviated and the agency cost can be reduced in family firms because of the alignment of the goal and interest between owners and managers. The uncertainty of the firm value could thus be decreased. Due to the alignment of managers'personal goals to firms'goals and they are highly identified with the organization, the managers of family firms are more likely to act as stewards of the firm to pursue and maximize owner's interests. The "familiness" of the family firms is a valuable and unique resource which cannot be easily imitated or substituted by their competitors and thus may help family firms to gain competitive advantage. Also, the altruism and trust culture as well as the long-term orientation which are prevalent in family firms can decrease the uncertainty of the firm value.The empirical findings suggest that, when controlling for other factors, the IPO underpricing level of family firms are lower than non-family firms at the 10% significance level. After further subdividing the family firms, the findings suggest that the young family firms'IPO underpricing level are lower than other types of firms. Also, the IPO underpricing level of family firms in which the CEOs are family member are lower than other types of firms. In the subsample of family firms, the empirical results suggest that non-family member CEO will increase the IPO underpricing. However, this effect is weakened by the increase in the percentage of family directors in the board. Overall, the empirical findings support the hypothesis that the involvement of the family members in family firms'management can be a signal to investors to deliver the information about firms'true value, and thus decrease the degree of IPO underpricing.