Managerial ability, growth opportunities, and IPO performance

Abstract

Purpose

The purpose of this paper is to explain whether the level of managerial quality and growth opportunities influences the operating and return performance between single and dual class IPOs.

Design/methodology/approach

The sample includes 281 initial public offerings under a dual class share structure. This paper measures managerial ability using a score method design produced by (Demerjian et al., 2012). This paper follows (Chemmanur et al., 2011) in measuring post-IPO operating performance between dual and single-class firms. This paper follows Lyon et al. (1999) and Chemmanur et al. (2011) in measuring long-term post-IPO buy-and-hold return performance. This paper employs two measures of growth/investment using Tobin’s q and expenditures such as capital, research and development, and selling, general and administrative scaled to total assets (Daniel et al., 2016).

Findings

Firms with high-quality managers experience more underpricing than low-quality managers. Likewise, dual class firms of all manager and growth types hold less cash and leverage. Using Tobin’s q as a proxy for growth, dual class firms experience higher post-IPO operating performance regardless of managerial quality. Furthermore, the findings indicate minimal evidence that dual class firms underperform single-class IPOs, lending minimal support for the managerial entrenchment hypothesis.

Originality/value

This paper is the first to partition dual and single-class IPOs based on managerial quality and growth opportunities to test long-term differences in operating and return performance.

Citation

Cox, J.S. (2017), "Managerial ability, growth opportunities, and IPO performance", Managerial Finance, Vol. 43 No. 4, pp. 488-507. https://doi.org/10.1108/MF-07-2016-0218