116

Corporate Governance: An International Review, 2014, 22(2): 116131

Board Independence, Ownership Structure and

the Valuation of IPOs in Continental Europe
Fabio Bertoni*, Michele Meoli, and Silvio Vismara

Manuscript Type: Empirical

Research Question/Issue: We combine the value-creation and value-protection views of the board of directors to study the
impact of board independence (BI) on the value of the firm at the time of its initial public offering (IPO).
Research Findings/Insights: We conduct our analysis on a sample of 969 firms that went public in France, Germany, and
Italy between 1995 and 2011. We show that BI is a critical factor in the valuation of IPO firms. Our results support both the
value-creation and value-protection roles of the board of directors. The relative importance of the two roles of the board
varies over time, with value-creation (value-protection) dominating in IPOs of young (mature) companies.
Theoretical/Academic Implications: Our theoretical framework combines the agency and resource-dependence theories.
The impact of BI on IPO valuation depends on the importance of the value-creation and value-protection roles played by the
board. The change in the relative importance of the two roles determines a U-shaped relationship between BI and firm age.
Corporate governance is particularly important for young and innovative firms (where the resource-dependence theory
applies, and governance acts as a value-creation device), as well as for mature firms and for companies where ownership
and control are separated (where the agency theory applies, and governance serves as a value-protection mechanism for
minority shareholders).
Practitioner/Policy Implications: We show that corporate governance is a significant factor affecting the valuation of an IPO
company. The importance of BI varies substantially with the knowledge intensity of the industry, the separation between
ownership and control, and the age of the listing company.

Keywords: Corporate Governance, Board Composition, Shareholder Value, Agency Theory, Resource Dependence
Theory

INTRODUCTION managers by ensuring that they operate in the interests of

shareholders. A well-functioning BoD should determine

T he contribution of the board of directors (BoD) to the

value of a company may be split along two dimensions.
First, an effective BoD protects suppliers of finance from
managerial misbehavior, reducing the cost of, and facilitat-
ing access to, external capital. Second, the BoD may give the
company a competitive advantage by providing reputation,
a network of contacts, and strategic advice. Behind these
two dimensions lie two different theoretical perspectives
and two streams of literature that, only recently, have been
converging.
The first theoretical perspective is the agency view of the
BoD. According to this view, the BoD is a value-protection
device: the role of the BoD is to monitor the behavior of
*Address for correspondence: Fabio Bertoni, EMLYON Business School, Research
Center on Entrepreneurial Finance (ReCEntFin), Department of Economics,
Finance and Control, 23 Avenue Guy de Collongue, 69134 Ecully, France.
E-mail: bertoni@em-lyon.com
higher firm valuation by inducing managers to exert more
effort and to restrain from extracting private benefits
(Hermalin & Weisbach, 2001). The second theoretical per-
spective is the resource-dependence view of the BoD.
According to this view, the BoD is a value-creation device:
the role of the BoD is to provide valuable resources to the
firm, contributing to its competitive advantage. A well-
functioning BoD should determine higher firm valuation by
giving strategic advice, contributing to the firms reputation,
and expanding the firms network of business contacts (Coff,
1999).
These two perspectives are not mutually exclusive, and
each BoD simultaneously performs both value-protection
and value-creation mechanisms. However, the relative
importance of the two roles varies across the life-cycle of the
firm, with the value-creation function being dominant when
the firm is young and the value-protection function taking

2014 John Wiley & Sons Ltd

doi:10.1111/corg.12051
BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION
the lead as the company matures (Filatotchev, Toms, &
Wright, 2006). The evolving impact of the BoD on firm value
across the firms life-cycle has relevant implications for the
empirical analysis of the relationship between value and
governance. However, this aspect has not received sufficient
attention in the academic literature, and the present work
aims to fill this gap.
In this paper, we argue that the firm characteristics mod-
erating the impact of board independence (BI) on firm value
depend on the age of the company, reflecting which function
of the BoD (i.e., value-creation or value-protection) domi-
nates. According to the resource-dependence view (which
dominates for young companies), BI is particularly impor-
tant in high-tech and innovative companies. According to the
agency view (which dominates for older companies), BI is
particularly important when minority shareholders are
exposed to the risk of expropriation. Age itself moderates the
impact of BI on firm value, and it will have a different mar-
ginal effect depending on which function of the BoD domi-
nates. When the value-creation (or value-protection) function
is dominant, BI will increase in importance as the age of the
firm decreases (or increases). As a result of the boards
gradual switch from a value-creation to a value-protection
role, the impact of BI on the firms valuation has a U-shaped
relationship with company age.
We study how BI affects firm value across the life-cycle of
the firm in a sample of 969 IPOs between 1995 and 2011 in
the three largest economies in continental Europe: France,
Germany, and Italy. IPOs are a particularly interesting unit of
analysis to study the effect of the dual nature of BoDs. At the
time of the IPO, the corporate governance of the firm is
clearer than at any other point in the firms history (Bruton,
Filatotchev, Chahine, & Wright, 2010). However, companies
may reach the IPO at different stages in their life-cycle, with
corresponding different dominant functions of the BoD. This
is particularly true in continental Europe, where the nature
of the firms going public and the mechanisms to separate
ownership from control are more diverse than they are in
the United States (Ritter, 2003). These characteristics allow
us to study the role of BI across a broad spectrum of stages of
maturity and ownership structures of the listing companies.
Our work contributes to the literature in three ways. First,
we add to the IPO literature by showing that the contribu-
tion of BI to the IPO valuation is sizeable across the entire
life-cycle of the firm. Second, we show that BI is not equally
important for all IPO firms, but that some firm characteris-
tics moderate its impact on valuation. The relevant moderat-
ing factors, however, depend on which function of the BoD
dominates, which is the third contribution of our paper. In
young companies, the impact of BI on firm valuation is
higher when the firm is younger and more innovative. In
mature companies, the impact of BI increases with age, and
it is particularly pronounced when ownership and control
are separated.
The rest of the paper is organized as follows. In the next
section, we briefly review the literature and illustrate our
research hypotheses. In the following section, we illustrate
the methodology and sample used in this study. Next, we
report the results of our empirical analyses and discuss their
robustness. In the final section of the paper, we provide
some concluding remarks.
2014 John Wiley & Sons Ltd
117
LITERATURE REVIEW AND HYPOTHESIS
DEVELOPMENT
IPO Valuation and Corporate Governance
The valuation of an IPO company is determined by many
factors. IPO valuation is influenced by numerous country-
specific institutional characteristics, including listing stan-
dards (Johan, 2010) and the quality and enforcement of
securities laws (Jackson & Roe, 2009; La Porta, Lopez-de-
Silanes, & Shleifer, 2006). Firm-specific characteristics influ-
encing IPO valuation include the listing firms fundamentals
(Aggarwal, Bhagat, & Rangan, 2009; Kim & Ritter, 1999),
ownership structure (Meoli, Paleari, & Vismara, 2009; Yeh,
Shu, & Guo, 2008), prestige of the top management team
(Cohen & Dean, 2005; Pollock & Gulati, 2007), and academic
affiliation (Bonardo, Paleari, & Vismara, 2011). Finally, a very
important factor influencing the valuation of companies at
the IPO stage is the quality of their corporate governance
(Bell, Moore, & Filatotchev, 2012; Certo, 2003). Overall, the
empirical evidence is supportive of the existence of a posi-
tive link between corporate governance quality and the valu-
ation of IPO firms.1 Sanders and Boivie (2004) study a
sample of 183 publicly traded US internet firms that went
public between 1993 and 1999. The valuation of these firms
was strongly associated with several measures of corporate
governance, including BI. Chahine and Filatotchev (2008)
analyze 140 French IPOs from 1996 to 2000. They show that
BI was positively correlated with a higher valuation of the
company at the IPO. Using a sample of 251 IPOs in the
United Kingdom, Filatotchev and Bishop (2002) show that
by improving their corporate governance (including BI),
firms can go public with less underpricing.
The evidence of a positive relationship between corporate
governance and IPO valuation is consistent with both the
value-creation and value-protection roles played by the BoD.
The actual mechanism driving the influence of corporate
governance on IPO valuation, however, differs depending
on which of the two roles of the board dominates. According
to the resource-dependence view, corporate governance is
linked to higher valuation because firms with better corpo-
rate governance have better access to valuable resources
(Coff, 1999). In contrast, the agency view argues that better
corporate governance is linked to higher valuation because
more of the potential value of the company is captured by its
shareholders, rather than extracted by managers or control-
ling shareholders (Dyck & Zingales, 2004). Interestingly,
although the two theories agree that corporate governance
matters, they produce different predictions about when it
matters most. In the next two sections, we will develop
distinct hypotheses on the importance of BI in IPO valuation,
based on the resource-dependence and agency theories.
IPO Valuation and Value-Creation by the Board
of Directors
The value-creation role of the BoD is dominant in young
companies (Filatotchev et al., 2006). Certo, Covin, Daily, and
Dalton (2001) argue that, in young organizations, the agency
view is not as prevalent as compared to mature firms.
Instead, the resource-dependence view is dominant in
Volume 22 Number 2 March 2014
118
young companies, in which the BoDs stock of knowledge,
experience, and network of contacts can contribute to the
firms competitive advantage. The BoD may play a strategic
role in the decision-making process (Zahra & Pearce, 1989).
Outside directors may facilitate the exchange of strategic
information between young companies and established
players (Geletkanycz & Hambrick, 1997), compensate for the
lack of experience and contacts of the firms executives
(Shivdasani & Yermack, 1999), and reduce the tendency of
the management to commit excessively to the firms current
strategy (Hambrick, Geletkanycz, & Fredrickson, 1993). As a
company matures, it will gradually acquire strategic knowl-
edge and develop its own business contacts, reducing the
marginal importance of BI. Accordingly, we formulate the
following hypothesis:
Hypothesis 1. In young companies, the marginal effect of board
independence on the IPO valuation decreases with the firms
age.
The value-creation role of the BoD will be more crucial in
high-tech and innovative companies (Bertoni, Colombo, &
Croce, 2013). In high-tech and knowledge-intensive sectors,
independent directors play a key role in advising managers
and supporting the firms innovation process (Catherine,
Corolleur, Carrre, & Mangematin, 2004; Higgins, Stephan,
& Thursby, 2008; Lacetera, 2001). Accordingly, we expect, all
other things being equal, that when the value-creation role of
the BoD is dominant, the marginal effect of BI on IPO valu-
ation will be higher in high-tech and knowledge-intensive
industries, which leads to our second hypothesis.
Hypothesis 2. In young companies, the marginal effect of board
independence on the IPO valuation is higher in high-tech and
knowledge-intensive industries.
However, innovative companies are found not only
in high-tech and knowledge-intensive sectors (Von
Tunzelmann & Acha, 2005). An alternative way to identify
companies for which the value-creation role of the board is
especially important is to look at the segment of the stock
exchange where they went public. Several European stock
exchanges have created specific segments of the market
where small companies with innovative business models
may list and raise funds (Vismara, Paleari, & Ritter, 2012).
We expect the value-creation role of the BoD to be more
relevant in companies listing on these second markets.
Hypothesis 3. In young companies, the marginal effect of board
independence on the IPO valuation is higher for firms listing
on second markets.
IPO Valuation and Value-Protection by the Board
of Directors
According to the agency view, the main role of the BoD is not
to channel valuable resources to the company, but to act as
a monitoring device. Outside directors are particularly
involved in the monitoring role of the BoD (Hermalin &
Weisbach, 1988). Parallel to what is argued in the previous
section, the agency view of the role of the BoD becomes
Volume 22 Number 2 March 2014
CORPORATE GOVERNANCE
dominant in firms in later stages of their life-cycle
(Filatotchev et al., 2006). Older companies tend to have stable
cash flows in excess of their profitable investment opportu-
nities, which exacerbates the potential for value expropria-
tion (Jensen, 1986). In family firms, misbehavior tends to be
more likely when ownership is passed across generations
and the social interaction among family members weakens
(Lubatkin, Schulze, Ling, & Dino, 2005; Mustakallio, Autio,
& Zahra, 2002). The more a company matures, the more the
value-protection function of the BoD becomes crucial.
Accordingly, we expect that, in mature companies in which
the value-protection role of the BoD dominates, the marginal
effect of BI will increase with firm age.
Hypothesis 4. In mature companies, the marginal effect of board
independence on the IPO valuation increases with the firms
age.
In the European context, where widely held companies are
relatively uncommon (La Porta, Lopez-de-Silanes, Shleifer,
& Vishny, 1998) and the value of control is relatively high
(Dyck & Zingales, 2004), the BoD may be especially useful
for curbing the extraction of private benefits from controlling
shareholders. A dimension of the ownership structure that
has a significant impact on firm value is the separation of
cash-flow and voting rights (Faccio & Lang, 2002; La Porta,
Lopez-de-Silanes, Shleifer, & Vishny, 2002). There are two
main reasons why this separation may affect valuation of an
IPO company. First, the interest alignment hypothesis pre-
dicts that a higher level of cash-flow rights should capture
an incentive of large shareholders to maximize a firms value
and minimize agency misconduct. We expect underwriters
and aftermarket investors to incorporate these effects into
their valuation of the firms shares. Second, the entrench-
ment hypothesis claims that the controlling shareholder may
be strongly motivated to expropriate minority shareholders
opportunistically through opaque transactions, in which
profits are transferred to other companies that are controlled
by the controlling shareholder (Fan & Wong, 2002). Accord-
ing to the agency view, appropriate corporate governance
mechanisms (including BI) can be envisaged to minimize
the loss derived from the separation between ownership and
control (Yeh & Woidtke, 2005). Thus, we may expect BI to
compensate, at least in part, for the negative impact of this
separation on firm value (Erickson, Park, Reising, & Shin,
2005). We summarize this discussion in the following
hypothesis:
Hypothesis 5. In mature companies, the marginal effect of board
independence on the IPO valuation is higher when the separa-
tion between ownership and control is large.
SAMPLE, DATA, AND MODEL
Empirical Design
We perform our analysis on a sample of 969 IPOs that took
place in the period from 1995 to 2011 on the stock markets
of the three largest economies in continental Europe:
France, Germany, and Italy. For France, we consider the
Paris Bourse until 2004 and Euronext afterwards; for
2014 John Wiley & Sons Ltd
BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION
Germany, we consider the Deutsche Brse; and for Italy, we
consider the Borsa Italiana. The list of IPOs is selected from
the EURIPO database, which provides IPO prospectuses
and detailed information on all companies that have
recently gone public in Europe.2 We only include real
IPOs of newly issues shares; we exclude introductions (i.e.,
admissions with no initial offer), offers of existing shares
by selling shareholders, re-admissions, and cross-listings of
companies already listed on other stock markets. The IPOs
of investment entities and financial companies are also
excluded because they display different characteristics
compared to other IPO firms.
To test our hypotheses, we regress a variable measuring
IPO valuation against a variable measuring BI, while control-
ling for other firm characteristics and country, industry, and
time dummies. To capture how the impact of BI on IPO
valuation varies with firm age, we follow two alternative
approaches. First, by combining Hypothesis 1 (which pre-
dicts that the impact of BI declines with age in young com-
panies) and Hypothesis 4 (which predicts that the impact of
BI increases with age in mature companies), we expect the
impact of BI on IPO valuation to be U-shaped with age. We
test this hypothesis by interacting BI with age and age
squared. Hypotheses 1 and 4 will be supported if the qua-
dratic term is positive and the linear term is negative, such
that the effect of BI declines with age for young firms (i.e.,
age less than the minimum of the quadratic function) and
increases with age for mature firms (i.e., age greater than the
minimum of the quadratic function).
Second, we estimate a regression by interacting BI with
age on two subsamples, split based on the age of the listing
company. We expect the interaction term to be negative in
the subsample of young firms (i.e., age less than the median
age) and positive in the subsample of old firms (i.e., age
greater than the median age). We also use the sample-split
estimation, which is based on a simpler specification, to test
Hypotheses 2, 3, and 5.
Variables
Dependent Variable. To investigate the determinants of
the initial market valuation, we rely upon Tobins Q. This
measure is defined as the ratio of the market value of the
outstanding financial claims on the firm to the current
replacement cost of the firms assets. Tobins Q is a widely
recognized indicator of the firms future growth opportuni-
ties as assessed by the investors market. It has been exten-
sively adopted in the literature on IPO valuation (e.g.,
Bonardo et al., 2011; Daily, Certo, & Dalton, 2005). Tobins Q
is usually computed as the ratio of the market value of assets
to the book value of assets. The market value is calculated as
the sum of the book value of assets and the market value of
common stock, minus the book value of common stock. In
our main analysis, we compute the market value of common
stock based on the IPO offer price. We verify the robustness
of our results by calculating the value of common stock
based on the preliminary market price and the first-day
market price. We also perform our regressions using alter-
native valuation measures, such as the market-to-book ratio
and the EV/Sales ratio.
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119
Board Independence. In line with prior research, we
compute the Board Independence variable as the proportion
of non-executive members on the board, as reported in the
IPO prospectus (Chancharat, Krishnamurti, & Tian, 2012;
Kang, Cheng, & Gray, 2007).3
Separation of Ownership and Control. We employ two
variables to test for the effect of the separation of ownership
and control on the valuation of IPO companies. First, we
compute cash-flow rights (C) by measuring the controlling
shareholders percentage ownership of the profits and divi-
dends of the firm. If multiple chains of ownership exist, then
the cash-flow rights along each chain are the products of all
ownership rights in the intermediate companies along that
chain. The total cash-flow rights are equal to the sum of all
cash-flow rights from all ownership chains (Faccio & Lang,
2002).
We measure the controlling shareholder voting rights (V)
by following the procedure used by La Porta et al. (1998).
Following Faccio and Lang (2002), when multiple control
chains exist, the voting rights are the sum of the voting
rights along each chain with the weakest link among all
holding layers. The ratio of the controlling shareholders
voting to cash-flow rights (V/C) approximates the diver-
gence from the one share/one vote ownership structure.
This ratio is used to proxy for the controlling owners motive
to extract wealth from the firm.
Age. Firm Age is the age of the IPO firm, in years, since
foundation. In the regression, we use Log (1 + Age).
High-tech and Knowledge-Intensive Industries
(HTKIS). To identify high-tech industries in our sample, we
use the Eurostat (2009) sectoral classification. Manufacturing
industries are classified as high-tech, medium-tech, or low-
tech, according to their technological intensity (R&D
expenditure/value added). Services are aggregated into
knowledge-intensive services and less knowledge-intensive
services, based on their share of tertiary educated persons.
The HTKIS is equal to one for listing companies operating in
manufacturing sectors classified as high- or medium-tech, or
in service sectors classified as knowledge-intensive.
Second Markets. Stock exchanges in Europe are orga-
nized in segments, with a main market and one or more
second-tier markets dedicated mostly to small companies
with innovative business models (Vismara et al., 2012). The
Second Markets dummy is equal to one for firms listed in
these markets.
Control Variables. Several control variables, chosen on
the basis of prior IPO literature, are also included in the
model. First, we consider three board-related variables,
namely Board Ownership, Board Size, and CEO Duality.
Board Ownership is measured as the ratio of total beneficial
shares held by executive directors at year-end to the total
number of shares outstanding at year-end. We measure
Board Size as the number of directors on the board, includ-
ing the chairperson (Chancharat et al., 2012). In IPO firms,
small boards have the advantages of being able to monitor
management better and to enact decisions more quickly
Volume 22 Number 2 March 2014
120
(Fischer & Pollock, 2004). CEO Duality is a binary variable
equal to one when the CEO and the chairman of the board of
directors are the same person (Lin & Chuang, 2011). CEO
duality may reduce the principal-agent conflicts, but may
also result in managerial entrenchment (Young, Tsai, &
Hsieh, 2008). On average, the literature shows that CEO
duality negatively affects the probability of success of IPOs
(Certo et al., 2001).
In terms of firm characteristics, we define size as the loga-
rithm of net sales for the year prior to the IPO date, adjusted
for inflation (Vismara et al., 2012). Smaller firms typically
show higher Tobins Q because of their better future growth
opportunities. We control for profitability (return on assets)
and leverage (debt over total assets), as more profitable and
less indebted IPO firms are expected to be worth more
(Bonardo et al., 2011). We also control for the size and struc-
ture of the offer, to account for the effects of the nature of
shares offered to the public. The size of the offer relative to
the size of the firm is expected to signal market confidence
and, therefore, to be positively related to the firms valuation.
The structure of the offer is measured in terms of secondary
shares sold by existing shareholders relative to the total
number of shares offered. An offer with a larger fraction of
newly issued shares signals a higher commitment by exist-
ing shareholders.4 Related to the characteristics of the offer,
we control for the reputation of the underwriter5 and for the
market momentum, defined as the FTSE Euromid percent-
age index return calculated over the 6 months before the
offer date (Cogliati, Paleari, & Vismara, 2011).
Entrepreneurs may seek to increase their offering pro-
ceeds by opportunistically manipulating earnings through
the management of accruals, to deceive investors temporar-
ily before going public (Teoh, Welch, & Wong, 1998). There-
fore, we control for pre-IPO abnormal accruals, corrected for
accounts receivables, by following DuCharme, Malatesta,
and Sefcik (2001). The actual accruals are compared to
conditionally expected accruals predicted by a regression
model, and the difference (abnormal accruals) is attributed
to earnings management activities.
To estimate the expected accruals, each offering firm is
pooled with other firms in the same two-digit SIC code
industry (among all firms listed simultaneously for at least 2
years on Euronext, Frankfurt, and Milan). Then, the coeffi-
cients of the following equation are estimated by ordinary
least squares (OLS):
WACijp = jp + jp [ REVijp ] + ijp
where WACijp represents working capital accruals in year p
for the ith firm in the industry group matched with offer-
ing firm j; REVijp is the change in revenues in year p for
the ith firm in the industry group matched with offering
firm j; and ijp accounts for the regression disturbances,
which are assumed to be cross-sectionally uncorrelated and
normally distributed with zero means. As we rely on a
cross-country sample, we also control for the market of
listing (Deutsche Brse for Germany, Borsa Italiana in Italy,
and Paris Bourse or Euronext for France). Given that IPOs
tend to cluster in time and industry, we control for IPO
year and industry.6
Volume 22 Number 2 March 2014
CORPORATE GOVERNANCE
Estimation
One major concern with the analysis of the cross-sectional
determinants of valuation is the potential endogeneity
between a firms IPO value and its BoD structure. Tobins Q
and BI can be jointly affected by the firms unobserved char-
acteristics, which may result in spurious correlations
(Hermalin & Weisbach, 2001). We address this issue by
employing an instrumental variable approach, using a two-
stage least squares (2SLS) regression. In the first stage, BI is
instrumented by using the Mimicking Behavior variable,
which is defined as the ratio of non-executive members in
the BoDs of all the firms belonging to the same industry (ICB
code, first digit) and listed in the same stock market in the
IPO year. Mimicking is a common behavior to achieve social
legitimacy (Deephouse, 1996, 2000; Deephouse & Carter,
2005), and it is particularly important for IPOs (Bell et al.,
2012).
EMPIRICAL RESULTS
Descriptive Statistics
Table 1 categorizes the sample of 969 IPOs by stock
exchange, age, and IPO year. There is a wide distribution of
firm age at IPO. Most of the sample firms were younger than
5 years old, and 257 (26.5 percent) of them were less than 1
year old, at the time of listing. At the other extreme, 327 (33.7
percent) companies in our sample went public when more
than 10 years old. This diversity is crucial for our analysis,
because it allows us to study the roles of BoDs correspond-
ing to a wide range of company ages at the time of listing.
Table 2 reports the means, correlation coefficients, and
variance inflation factors (VIFs) for all variables. On average,
the companies in our sample are 19 years old at IPO, a much
higher age than is observed for IPOs in the United States and
the United Kingdom (Ritter, 2003; Vismara et al., 2012).
Firms going public in Italy are relatively more mature than
those in France and Germany (on average, 28.76 years). The
average size of IPO firms is not statistically different across
countries. The highest Tobins Q is found in German com-
panies (average Tobins Q 6.43 in Germany, 4.37 in France,
and 3.70 in Italy), which also have the highest degree of BI
(on average, 56.25 percent in Germany, 51.50 percent in
France, and 53.16 percent in Italy) and the lowest separation
between ownership and control (average V/C is 1.04 in
Germany, 1.24 in France, and 1.47 in Italy). Board Ownership
is, on average, 20 percent in France and more than 30 percent
in Germany and Italy, where boards are larger (on average,
Board Size is 5.84 in France, 6.87 in Germany, and 7.24 in
Italy). With smaller boards, the CEO is also the chairman of
the board in most French firms (60 percent), whereas these
two roles are typically split in German firms (average CEO
Duality 14 percent).
Several other variables do not differ significantly between
countries. On average, Profitability (return on assets) is 17
percent and Leverage is 66 percent. The relative size of offer
(shares offered over shares outstanding) is larger in Italy,
whereas the percentage of secondary shares (Offer Struc-
ture) is higher in Germany. German firms are more often
VC-backed (50 percent), as compared to French (35 percent)
and Italian IPOs (21 percent). Finally, there appears to be no
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BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION 121

TABLE 1
Sample of IPOs

Sample France Germany Italy

N % N % N % N %

Age at IPO (Years)

Age < 1 257 26.5 109 25.5 121 31.6 27 17.1
1 < Age <5 247 25.5 143 33.4 87 22.7 17 10.8
5 < Age <10 138 14.2 70 16.4 50 13.1 18 11.4
Age > 10 327 33.7 106 24.8 125 32.6 96 60.8
IPO Year
19951999 222 22.9 123 28.7 82 21.4 17 10.8
20002003 324 33.4 132 30.8 133 34.7 59 37.3
20042007 286 29.5 151 35.3 77 20.1 58 36.7
20092011 137 14.1 22 5.1 91 23.8 24 15.2
Total 969 100.0 428 100.0 383 100.0 158 100.0

major concern for multicollinearity among the independent
variables in the regression models, because most correla-
tions are low and no VIF exceeds five.
Econometric Results
We begin our analysis by studying how the relationship
between BI and IPO valuation is affected by the firms age, as
illustrated in Hypotheses 1 and 4. The results of the regres-
sions are reported in Table 3. First, we report the results of a
baseline regression estimated using OLS (Model 1) and 2SLS
(Model 2). Both models report a positive effect of BI on IPO
valuation, consistent with the extant literature (e.g., Chahine
& Filatotchev, 2008). The sign and significance of BI are
consistent across both models. The first stage of the regression
shows that the instruments have the expected signs, and that
Mimicking Behavior is highly statistically significant.
We add the linear and quadratic interactions between BI
and age in Model 3 (OLS) and Model 4 (2SLS). Both models
confirm that age affects the impact of BI on IPO valuation. We
find a negative and significant coefficient for the linear inter-
action, and a positive and significant coefficient for the
squared interaction. Thus, as expected, the marginal effect
of BI is U-shaped: the impact of BI decreases with age
for young companies (consistent with Hypothesis 1) and
increases with age for mature companies (consistent with
Hypothesis 4). The turning point is estimated to correspond
to an age of 34 years (Model 4), well within the range of
variation of age observed for listing companies in our
sample. For a company at the turning point, a one standard
deviation increase in BI results in an increase in Tobins Q by
12.5 percent (Model 4). Due to the U-shape of the marginal
effect of BI, the effect is larger for companies aged below or
above this turning point. If we consider companies one stan-
dard deviation above (below) the turning point, we observe
(Model 4) a marginal effect of BI larger by 1.5 percent (5.4
percent).
We also study the effect of age on the impact of BI on IPO
valuation by splitting the sample between young and mature
firms (above or below the median age). The results are con-
sistent with those of Models 3 and 4. In young companies
(Model 5), the marginal effect of BI on the IPO valuation
decreases with the firms age, whereas in mature companies
(Model 6), the marginal effect increases with the firms age.
Thus, Hypotheses 1 and 4 are validated. The impact of age on
the marginal effect of BI is not only statistically significant,
but also economically sizeable. The marginal effect of BI in a
company whose age corresponds to the first quartile is 10.3
percent larger than that in a median aged company (Model
5). The marginal effect of BI in a company whose age corre-
sponds to the third quartile is 6.1 percent larger than that in
a median aged company (Model 6).
Table 4 reports the results obtained by interacting BI with
HTKIS, Second Markets, and separation between ownership
and control. Each regression is conducted on the full sample
and by splitting the sample between young and old compa-
nies. Model 1 shows that the interaction between BI and the
HTKIS dummy is positive and significant. This result indi-
cates that the marginal effect of BI on the IPO valuation is
higher in high-tech and knowledge-intensive industries.
Interestingly, when the sample is split on the basis of age, the
result holds only for young companies (Model 2) and disap-
pears for mature companies (Model 3). This evidence sup-
ports Hypothesis 2. Similarly, the interaction between BI and
the Second Market dummy, which is positive and significant
for the full sample (Model 4), is significant only in the
subsample of young companies (Model 5) and not signifi-
cant in the subsample of mature companies (Model 6). This
result is in line with Hypothesis 3.
In Models 79, we analyze the moderating effect of the
separation between ownership and control on the impact of
BI on IPO valuation. Consistent with our expectations, the
separation between ownership and control is negatively
associated with IPO valuation. The interaction term between
BI and V/C is positive (Model 7), indicating that corporate
governance may reduce the risk of value expropriation for
minority investors. When the sample is split by age, we find
that the result holds only for mature companies (Model 9),

2014 John Wiley & Sons Ltd Volume 22 Number 2 March 2014
 122

Volume 22
TABLE 2
Descriptive Statistics and Correlation Matrix

Number 2
Variables Sample France Germany Italy 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 VIF

1 Tobins Q 5.07 4.37*** 6.43*** 3.70*** 1.000

2 Board 53.65 51.50*** 56.25*** 53.16 .017 1.000 1.07
Independence
4 Age 18.78 16.51** 17.19 28.76*** .238 .017 1.000 1.14
3 V/C 1.2 1.24 1.04*** 1.47*** .132 .004 .032 1.000 1.11

March 2014
5 C 46.19 47.22 48.97*** 36.65*** .030 .003 .279 .066 1.000 1.20
6 Board 27.24 19.86*** 31.59** 36.71*** .018 .028 .008 .004 .077 1.000 1.17
Ownership
7 Board Size 6.48 5.84*** 6.87*** 7.24*** .078 .243 .063 .064 .013 .203 1.000 1.26
8 CEO Duality 38.91 59.58*** 14.36*** 42.41 .166 .074 .060 .010 .038 .027 .293 1.000 1.14
9 Firm Size 280.84 280.95 257.54 337.03 .130 .023 .000 .120 .115 .611 .203 .007 1.000 1.36
10 Profitability 17.01 11.16 24.94 13.66 .020 .011 .001 .019 .022 .003 .008 .038 .005 1.000 4.06
11 Leverage 66.2 31.86 121.53 25.08 .048 .022 .009 .009 .024 .001 .005 .034 .002 .947 1.000 4.08
12 Offer Size 41.06 28.57** 41.06 74.86*** .051 .024 .001 .044 .056 .002 .048 .034 .007 .011 .014 1.000 1.05
13 Offer Structure 24.18 50.45*** 78.06*** 66.31 .178 .033 .055 .070 .116 .002 .003 .123 .050 .016 .010 .048 1.000 1.07
14 Underwriter 23 14.25*** 27.94*** 35.44*** .034 .032 .020 .105 .003 .070 .187 .076 .185 .037 .066 .005 .019 1.000 1.13
reputation
15 Market .38 .18 .47 .69 .024 .002 .024 .034 .003 .022 .008 .003 .036 .016 .021 .134 .006 .012 1.000 1.04
Momentum
16 Accruals .00 .01 .01 .03 .008 .035 .032 .073 .017 .050 .013 .014 .069 .034 .004 .002 .018 .001 .001 1.000 1.02
17 VC Backing 38.49 35.05 49.61*** 20.89*** .162 .032 .049 .093 .177 .100 .025 .010 .105 .009 .040 .014 .072 .006 .046 .065 1.000 1.10
18 VC Reputation 1.13 .57** 1.70* 1.26 .066 .004 .016 .025 .133 .111 .033 .005 .052 .022 .005 .006 .027 .036 .062 .015 .172 1.000 1.06
19 Mimicking 54.41 51.99*** 57.74*** 52.87** .165 .449 .062 .048 .005 .024 .143 .146 .030 .059 .058 .044 .081 .014 .010 .026 .083 .016 1.000
Behavior

This table presents averages for the variables employed in the regression analyses on the whole sample and on country subsamples, as well as correlations between variables. Tobins Q is the ratio of the ratio of the market value of assets (the sum of the
book value of assets and the market value of common stock, based on the IPO offer price, minus the book value of common stock) to the book value of assets. Board Independence is the percent of non-executive members on the board, as reported in the
IPO prospectus. Age is the logarithm of one plus the age of the company in years. V/C is the ratio of the controlling shareholders voting rights (V) to its cash-flow rights (C). C measures the controlling shareholders percentage ownership of the profits
and dividends of the firm. If multiple chains of ownership exist, then the cash-flow rights along each chain are the products of all ownership rights in the intermediate companies along that chain. The total cash-flow rights are equal to the sum of all cash-flow
rights from all ownership chains. V is computed as in La Porta et al. (1998). When multiple control chains exist, the voting rights are the sum of the voting rights along each chain with the weakest link among all holding layers. Board Ownership is measured
as the ratio of total beneficial shares held by executive directors at year-end to the total number of shares outstanding at year-end. Board Size is the number of directors on the board, including the chairperson. CEO Duality is a dummy indicating when
the CEO and the chairman of the board of directors are the same person. Firm Size is the logarithm of net sales for the year prior to the IPO date, adjusted for inflation. Profitability is the return on assets in the year before the IPO. Leverage is debt over
total assets in the year before the IPO. Offer Size is the ratio (in percent) between the size of the firm and the size of the offer. Offer Structure is the fraction (in percent) of secondary shares sold by existing shareholders relative to the total number of shares
offered. Reputation of the underwriter is equal to 100 when the underwriter is in the Carter-Manaster ranking (list taken from Jay Ritters website), and otherwise as equal to the underwriters percentage market share in terms of number of IPOs
underwritten in Europe during 1995 to 2011. Market Momentum is defined as the FTSE Euromid percentage index return calculated over the 6 months before the offer date. VC backing is a dummy variable indicating that the firm is VC-backed at the
IPO. VC Reputation is measured as the cumulative market capitalization of IPOs backed by the VC in continental European markets. Accruals is a measure of pre-IPO abnormal accruals computed following DuCharme et al. (2001). Mimicking Behavior
is defined as the ratio of non-executive members in the BoDs of all the firms belonging to the same industry (ICB code, first digit) and listed in the same stock market in the IPO year. For the sake of readability all dummy variables in this Table are multiplied
by 100. Stars for averages refer to tests for differences between a single country and the rest of the sample. ***, **, and * indicate significance levels below 1%, 5%, and 10%, respectively. For correlation coefficients, indicates a significance level below
1%. Variance Inflation Factors (VIFs) are obtained after estimating an OLS regression of Tobins Q against all variables, except the instrumental variable (Mimicking Behavior).

2014 John Wiley & Sons Ltd

CORPORATE GOVERNANCE
BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION 123

TABLE 3
Effect of Board Independence on IPO Valuation: Moderating Effect of Age and Age Squared

(1) (2) (3) (4) (5) (6)

OLS 2SLS OLS 2SLS 2SLS split samples

1st stage 2nd stage 2nd stage 2nd stage 2nd stage
Young Old

Board Independence 1.567*** 3.309*** 2.577*** 5.683*** 3.675** 8.661***

(.437) (.924) (.582) (1.593) (1.497) (1.894)
Board Independence Age .771*** 1.540*** .444** 1.316***
(.219) (.478) (.197) (.318)
Board Independence Age2 .126*** .216***
(.035) (.072)
Age .154 .006 .125 .153 .125 .223 1.364
(.226) (.015) (.220) (.224) (.218) (.628) (1.324)
Age2 .027 .001 .034 .028 .033 .046 .124
(.043) (.003) (.042) (.043) (.042) (.266) (.179)
V/C .237*** .005 .231*** .253*** .264*** .232* .233***
(.075) (.007) (.076) (.075) (.075) (.133) (.081)
C .003 .000 .003 .002 .000 .006 .001
(.004) (.000) (.004) (.004) (.004) (.006) (.005)
Board Ownership .545** .004 .566** .529** .549** .123 1.028***
(.244) (.015) (.242) (.243) (.241) (.371) (.340)
Board Size .034 .007*** .051** .033 .052** .102** .039
(.024) (.002) (.025) (.024) (.025) (.044) (.037)
CEO Duality .833*** .010 .816*** .839*** .831*** 1.011*** 1.009***
(.173) (.012) (.171) (.172) (.171) (.269) (.250)
Firm Size .738*** .003 .730*** .734*** .719*** .850*** .640***
(.047) (.003) (.047) (.047) (.047) (.077) (.072)
Profitability .048 .009** .055 .043 .025 .074 1.778**
(.112) (.004) (.113) (.113) (.111) (.068) (.769)
Leverage .006 .001** .004 .007 .009 .006 .255**
(.017) (.001) (.017) (.017) (.016) (.019) (.115)
Offer Size .027 .000 .020 .033* .031 .786 .016
(.018) (.001) (.019) (.019) (.021) (.758) (.016)
Offer Structure .313 .011 .281 .298 .233 .256 1.076***
(.361) (.007) (.356) (.360) (.351) (.370) (.363)
Underwriter Reputation .904*** .008 .920*** .909*** .926*** 1.869*** .669**
(.211) (.013) (.208) (.211) (.209) (.319) (.290)
Market Momentum 1.594 .016 1.769 1.499 1.579 .578 3.149
(2.047) (.131) (2.026) (2.056) (2.068) (3.330) (2.613)
Accruals .172 .006 .185* .175* .199* .191* 1.473***
(.105) (.006) (.101) (.106) (.102) (.111) (.452)
VC Backing .212 .002 .203 .175 .127 .521** .418
(.171) (.011) .125 (.171) (.170) (.257) (.256)
France 1.464*** .002 .883*** 1.435*** .587 1.121*** .107
(.218) (.017) (.322) (.218) (.485) (.392) (.939)
Italy 1.071*** .001 .643** 1.069*** .499 .192 .062
(.252) (.020) (.359) (.250) (.395) (.517) (.958)
Instrumental Variable
Mimicking Behavior .973***
(.048)
Constant 15.048*** .031 16.786*** 14.877*** 16.378*** 18.679*** 15.645***
(1.320) (.079) (1.235) (1.343) (1.334) (1.477) (2.867)
Observations 969 969 969 969 458 511
Statistics for OLS models:
Adj. R-squared .414 .418
Statistics for 2SLS models:
Centered R-squared (2nd stage) .430 .426 .436 .445
Cragg-Donald Wald F statistic 257.136 138.800 40.345 60.696
[Stock-Yogo weak ID test critical values: 5% maximal IV relative bias] [13.91] [9.53] [9.53] [9.53]
Hansen (endogeneity test) 4.600 4.762 .575 14.910
[Chi-sq(k) p-value] [.032] [.029] [.448] [.000]

This table reports the results of regressions in which Tobins Q is the dependent variable. Regressions are performed on the full sample of 969 European IPOs, or on subsamples split according to age (below
and above the median value; Models (56)). Model (1) is an OLS regression of the baseline specification. Model (2) is a 2SLS as in Model (1), in which the endogenous variable is Board Independence and the
instrument is Mimicking Behavior. Model (3) is an OLS regression, in which the interactions between Board Independence, Age, and Age2 are included. Model (4) is a 2SLS regression as in Model (3). Board
Independence and its interactions are instrumented by Mimicking Behavior and its interaction with Age and Age2. Models (56) are 2SLS regressions as in Model (4), in which the non-linearity of Age as a
moderating factor of the impact of BI is only captured by splitting the sample. In Models (46), the first stage is not reported for the sake of readability. Tobins Q is the ratio of the ratio of the market value of
assets (the sum of the book value of assets and the market value of common stock, based on the IPO offer price, minus the book value of common stock) to the book value of assets. Board Independence is the
percent of non-executive members on the board, as reported in the IPO prospectus. Age is the logarithm of one plus the age of the company in years. V/C is the ratio of the controlling shareholders voting rights
(V) to its cash-flow rights (C). C measures the controlling shareholders percentage ownership of the profits and dividends of the firm. If multiple chains of ownership exist, then the cash-flow rights along each
chain are the products of all ownership rights in the intermediate companies along that chain. The total cash-flow rights are equal to the sum of all cash-flow rights from all ownership chains. V is computed
as in La Porta et al. (1998). When multiple control chains exist, the voting rights are the sum of the voting rights along each chain with the weakest link among all holding layers. Board Ownership (in percent)
is measured as the ratio of total beneficial shares held by executive directors at year-end to the total number of shares outstanding at year-end. Board Size is the number of directors on the board, including the
chairperson. CEO Duality is a dummy indicating that the CEO and the chairman of the board of directors are the same person. Firm Size is the logarithm of net sales for the year prior to the IPO date, adjusted
for inflation. Profitability is the return on assets (in percent) in the year before the IPO. Leverage is debt over total assets (in percent) in the year before the IPO. Offer Size is the ratio (in percent) between the
size of the firm and the size of the offer. Offer Structure is the fraction (in percent) of secondary shares sold by existing shareholders relative to the total number of shares offered. Reputation of the underwriter
is equal to 100 when the underwriter is in the Carter-Manaster ranking (list taken from Jay Ritters website), and otherwise as equal to the underwriters percentage market share in terms of number of IPOs
underwritten in Europe during 1995 to 2011. Market Momentum is defined as the FTSE Euromid percentage index return calculated over the 6 months before the offer date. Accruals is a measure of pre-IPO
abnormal accruals computed following DuCharme et al. (2001). Mimicking Behavior is defined as the ratio of non-executive members in the BoDs of all the firms belonging to the same industry (ICB code, first
digit) and listed in the same stock market in the IPO year. All regressions control for time, industry, and country effects (Germany is the omitted category). Coefficients of time and industry effects are omitted
for readability. Heteroskedasticity-robust standard errors are reported in brackets. ***, **, and * indicate significance levels below 1%, 5%, and 10%, respectively.

2014 John Wiley & Sons Ltd Volume 22 Number 2 March 2014
124 CORPORATE GOVERNANCE

TABLE 4
Effect of Board Independence on IPO Valuation: Value-Creation, Value-Protection, and Role of Venture Capitalists
Value creation in high-tech firms Value creation in second markets Value protection and V/C Venture capital

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
Full Young Old Full Young Old Full Young Old VC- Non-VC-
sample firms firms sample firms firms sample firms firms backed backed

Board Independence 5.517*** 4.985** 3.860** 5.040*** 5.221** 4.174** 3.446*** 3.417* 3.087** 5.970*** 6.843**
(1.896) (1.998) (1.704) (1.336) (2.139) (1.695) (1.179) (1.876) (1.431) (1.909) (2.765)
Board Independence HTKIS 3.411* 2.999** .188
(2.012) (1.273) (1.833)
Board Independence Second Markets 1.572* 2.898** .190
(.942) (1.321) (1.363)
Board Independence V/C .593* .154 1.042**
(.352) (.574) (.466)
HTKIS 2.771** 2.153*** 1.008
(1.083) (.651) (.985)
Second Markets .840 .661 .485
(.534) (.831) (.701)
Board Independence Age 1.156** 2.436**
(.504) (1.117)
Board Independence Age2 .175** .349*
(.073) (.186)
Age .297 .027 1.309 .189 .250 1.620 .300 .231 1.194 .210 .387
(.227) (.635) (1.232) (.229) (.655) (1.220) (.220) (.636) (1.197) (.374) (.300)
Age2 .023 .099 .122 .061 .207 .162 .039 .051 .099 .098 .031
(.043) (.264) (.166) (.044) (.270) (.165) (.042) (.270) (.161) (.076) (.055)
V/C .230*** .229* .147 .204*** .157 .176** .264*** .290* .182** .286* .214**
(.069) (.127) (.092) (.067) (.147) (.077) (.078) (.150) (.084) (.149) (.091)
C .005 .006 .005 .003 .005 .003 .005 .006 .005 .007 .001
(.004) (.006) (.005) (.004) (.006) (.005) (.004) (.006) (.005) (.008) (.005)
Board Ownership .513** .121 .922*** .639** .057 1.051*** .569** .095 .932*** .432 .385
(.257) (.383) (.330) (.267) (.400) (.341) (.253) (.374) (.323) (.428) (.305)
Board Size .051* .094** .019 .071** .110** .025 .067** .100** .024 .061 .039
(.026) (.043) (.033) (.028) (.044) (.035) (.027) (.042) (.034) (.048) (.032)
CEO Duality .867*** .943*** .795*** .972*** 1.039*** .869*** .930*** .943*** .809*** 1.172*** .626***
(.184) (.274) (.233) (.186) (.277) (.234) (.182) (.274) (.232) (.288) (.212)
Firm Size .716*** .775*** .641*** .746*** .868*** .614*** .750*** .847*** .663*** .846*** .623***
(.050) (.079) (.066) (.054) (.079) (.076) (.049) (.076) (.066) (.083) (.061)
Profitability .021 .085 1.669** .009 .042 1.783** .002 .088 1.880*** .039 1.410*
(.095) (.065) (.742) (.127) (.072) (.746) (.118) (.066) (.723) (.079) (.727)
Leverage .015 .003 .236** .012 .009 .255** .011 .001 .269** .014 .024
(.014) (.021) (.111) (.019) (.021) (.111) (.017) (.019) (.108) (.012) (.016)
Offer Size .006 .435 .013 .010 .601 .019 .010 .657 .020 1.687** .046**
(.013) (.770) (.015) (.014) (.771) (.016) (.014) (.766) (.016) (.695) (.022)
Offer Structure .507 .262 1.288*** .546 .308 1.524*** .550 .283 1.430*** .166 1.058***
(.394) (.343) (.321) (.422) (.377) (.319) (.423) (.374) (.314) (.202) (.291)
Underwriter Reputation 1.116*** 1.883*** .619** 1.154*** 1.823*** .720** 1.179*** 1.868*** .631** 1.525*** .433
(.217) (.320) (.274) (.223) (.312) (.284) (.218) (.322) (.273) (.330) (.269)
Market Momentum 2.954 .732 3.582 3.512* 1.567 3.820 2.981 .873 3.408 .345 .936
(2.104) (3.354) (2.462) (2.121) (3.250) (2.529) (2.055) (3.275) (2.468) (3.938) (2.439)
Accruals .230* .157 1.480*** .270** .167 1.547*** .314*** .203* 1.444*** .111 1.021***
(.118) (.105) (.459) (.114) (.102) (.466) (.112) (.109) (.433) (.088) (.322)
VC Backing .507*** .405 .555** .527*** .495* .609*** .513*** .471* .625***
(.177) (.260) (.239) (.177) (.260) (.235) (.174) (.259) (.230)
VC Reputation 1.123
(1.392)
France 1.305*** 1.264*** 1.420** 1.217*** 1.216*** 1.289* 1.097*** .390 1.437*** 1.135** .013
(.271) (.351) (.601) (.277) (.345) (.665) (.250) (.504) (.279) (.557) (.521)
Italy .736** .758** .357 .884*** .954*** .497 1.335*** 1.213*** 1.383*** .572 .436
(.358) (.352) .853 (.340) (.321) (.617) (.225) (.348) (.285) (.803) (.431)
Constant 14.462*** 15.701*** 15.026*** 16.075*** 18.052*** 15.168*** 16.666*** 18.233*** 15.551*** 18.132*** 13.369***
(1.419) (1.849) (2.809) (1.312) (2.177) (2.732) (1.087) (1.495) (2.590) (1.762) (1.540)
Observations 969 458 511 969 458 511 969 458 511 373 596
Centered R-squared (2nd stage) .431 .540 .603 .422 .464 .449 .425 .541 .578 .485 .417
Cragg-Donald Wald F statistic 188.554 96.128 29.629 211.751 85.811 113.479 222.137 90.877 69.996 74.327 54.785
[Stock-Yogo weak ID test critical [11.04] [11.04] [11.04] [11.04] [11.04] [11.04] [11.04] [11.04] [11.04] [9.53] [9.53]
values: 5% maximal IV relative bias]
Hansen (endogeneity test) 7.426 .452 11.755 8.415 .411 9.869 2.584 .058 4.606 9.777 3.125
[Chi-sq(k) p-value] [.006] [.501] [.000] [.004] [.521] [.002] [.108] [.810] [.032] [.007] [.077]

This table reports the results of 2SLS regressions in which Tobins Q is the dependent variable. Models (13) test for the Value Creation effect of Board Independence, interacted with HTKIS, a dummy variable
equal to 1 for IPOs belonging to high- and medium-tech manufacturing sectors and knowledge-intensive service industries (Eurostat, 2009). Model (1) refers to the full sample, Model (2) to the sample of young
firms (age below the median value), and Model (3) to the sample of old firms (age above the median value). Models (46) test for the value-creation effect of BI, interacted with Second Markets, a dummy variable
equal to 1 for IPOs that took place on second markets. Models (4), (5), and (6) refer to the full sample, subsample of young firms, and subsample of old firms, respectively. Models (79) test for the value-protection
effect of BI, interacted with the separation between ownership and control (V/C). Models (7), (8), and (9) refer to the full sample, subsample of young firms, and subsample of old firms, respectively. HTKIS
and Second Market dummies are included in the models in which they are interacted. In the first stage (omitted), Board Independence and its interactions are instrumented by Mimicking Behavior, and by the
interaction of Mimicking Behavior and the HTKIS (Model 13), Mimicking Behavior and Second Markets (Model 46), or Mimicking Behavior and V/C (Model 79). Models (1011) are 2SLS regressions in which
the sample is split between VC-backed and non-VCbacked firms, respectively. VC-backing is dropped in both models, and VC reputation is included in Model (10). In Models (1011), the endogenous variable
is Board Independence and its interactions. The instrument is Mimicking Behavior and its interactions with Age and Age2. Tobins Q is the ratio of the ratio of the market value of assets (the sum of the book
value of assets and the market value of common stock, based on the IPO offer price, minus the book value of common stock) to the book value of assets. Board Independence is the percent of non-executive
members on the board, as reported in the IPO prospectus. Age is the logarithm of one plus the age of the company in years. V/C is the ratio of the controlling shareholders voting rights (V) to its cash-flow rights
(C). C measures the controlling shareholders percentage ownership of the profits and dividends of the firm. If multiple chains of ownership exist, then the cash-flow rights along each chain are the products
of all ownership rights in the intermediate companies along that chain. The total cash-flow rights are equal to the sum of all cash-flow rights from all ownership chains. V is computed as in La Porta et al. (1998).
When multiple control chains exist, the voting rights are the sum of the voting rights along each chain with the weakest link among all holding layers. HTKIS is a dummy variable identifying firms in a high-tech
and knowledge-intensive industry, according to the sectoral classification by Eurostat (2009). Second Markets is a dummy identifying firms listed in second-tier stock markets. Board Ownership is measured
as the ratio (in percent) of total beneficial shares held by executive directors at year-end to the total number of shares outstanding at year-end. Board Size is the number of directors on the board, including the
chairperson. CEO Duality is a dummy indicating that the CEO and the chairman of the board of directors are the same person. Firm Size is the logarithm of net sales for the year prior to the IPO date, adjusted
for inflation. Profitability is the return on assets (in percent) in the year before the IPO. Leverage is debt over total assets (in percent) in the year before the IPO. Offer Size is the ratio between the size of the firm
and the size of the offer. Offer Structure is the fraction of secondary shares sold by existing shareholders relative to the total number of shares offered. Reputation of the underwriter is equal to 100 when the
underwriter is in the Carter-Manaster ranking (list taken from Jay Ritters website), and otherwise as equal to the underwriters percentage market share in terms of number of IPOs underwritten in Europe
during 1995 to 2011. Market Momentum is defined as the FTSE Euromid percentage index return calculated over the 6 months before the offer date. Accruals is a measure of pre-IPO abnormal accruals computed
following DuCharme et al. (2001). Mimicking Behavior is defined as the ratio of non-executive members in the BoDs of all the firms belonging to the same industry (ICB code, first digit) and listed in the same
stock market in the IPO year. All regressions control for time, industry, and country effects (Germany is the omitted category). Coefficients of time and industry effects are omitted for readability.
Heteroskedasticity-robust standard errors are reported in brackets. ***, **, and * indicate significance levels below 1%, 5%, and 10%, respectively.

Volume 22 Number 2 March 2014 2014 John Wiley & Sons Ltd
BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION
whereas the coefficient is not significant among young com-
panies (Model 8). This evidence is in line with Hypothesis 5.
In each regression, we control for several factors that can
impact valuation. Among them, prior research has focused
particularly on the role of Venture Capital (VC), also com-
paring different institutional environments (Bruton et al.,
2010) and different control rights (Cumming, 2008). We do
not find clear evidence regarding the role of VC investors.
The VC-backing variable is always not significant in the
regressions on the subsample of young firms, whereas it is
typically significant in mature firms. When we split the
sample into VC-backed (Model 10) and non-VC-backed
firms (Model 11), the general results are confirmed in both
samples. We also assess the impact of the reputation of VCs,
in terms of the market shares of all VCs backing an IPO. This
parameter is measured as the cumulative market capitaliza-
tion of IPOs backed by the VC in continental European
markets, similar to Nahata (2008). The coefficient of this
variable in the regression on the subsample of VC-backed
IPOs (Model 10) is positive, as expected, but not significant.
In our sample, CEO duality leads to lower valuations for
firms going public. The coefficient of the CEO Duality vari-
able is persistently negative and significant across all models.
From an agency theory perspective, CEO duality limits the BI
and the boards ability to fulfill its governance role. This
observation is in line with the finding by Chahine and Tohm
(2009), who report that IPO firms with CEO duality report
more underpricing, due to their higher uncertainty.
Firms taken public by more reputable underwriters obtain
higher valuations. The reputation of underwriters acts as a
certification mechanism and positively affects IPO valuations
(Carter & Manaster, 1990). Other control variables that are
significant in some, but not all, of our models include Board
Size, Board Ownership, and Firm Size, which are negatively
correlated to the firms Tobins Q. Consistent with the value-
relevance hypothesis by DuCharme et al. (2001), Accrual
Accounting is positively associated with IPO valuation.
Overall, our results support the idea that, as the firm
matures, the BoD switches from a value-creation to a value-
protection mechanism. Different theoretical perspectives are
needed when analyzing young versus mature companies,
and different moderating factors affect the impact of BI on
IPO firm valuation, depending on the firms age. Measures
related to innovativeness, such as HTKIS and listing on
second markets, are relevant moderating factors for young
companies but not for mature ones, which instead have
separation between ownership and control as a key moder-
ating factor. Age is a relevant moderating factor for both
young and mature companies, but acting in opposite direc-
tions: BI is more important the younger a young company is
and the older a mature company is.
Robustness Tests and Sample Splits
In the previous section, we measure Tobins Q at offer price.
However, the existing literature indicates that underwriters
systematically discount their value estimates, in order to
augment investor participation and compensate for informa-
tion disclosure by informed investors (Loughran & Ritter,
2002). Accordingly, we test whether our results persist by
calculating Tobins Q with the preliminary offer price (the
2014 John Wiley & Sons Ltd
125
midpoint of the initial price range, as disclosed in IPO pro-
spectuses) and the first-day market price. In this way, we
control for the price revision and underpricing phenom-
enon. The former allows us to adjust the price by canvassing
investors demands, whereas the latter incorporates first-day
market effects.7
In Model 1 of Table 5, the dependent variable is Tobins Q
calculated by replacing the offer price with the preliminary
offer price. In Model 2, Tobins Q is calculated with the
first-day price. We also perform the regression analysis
using alternative valuation measures. In Model 3, the depen-
dent variable is the M/B ratio, calculated as market value of
equity over the book value of equity. In Model 4, we use the
EV/Sales ratio, in which EV is calculated as the sum of the
book value of assets and the market value of common stock,
minus the book value of common stock. The results do not
change significantly across the different models.
Our sample of IPOs covers 17 years and three countries.
While the span and breadth of the sample is one of the
distinctive merits of this paper, there is still a risk that the
results may be driven by a single country or special period.
To rule out this possibility, we run subsample regressions
distinguishing IPOs in the tech bubble years from 1999 to
2000 (Loughran & Ritter, 2004) and for each stock exchange.
Table 6 reports the results of these analyses.
We find that the key results are confirmed for IPOs in the
tech bubble (Model 1) and outside the bubble (Model 2),
although with lower statistical evidence for the former. In
young companies, the marginal effect of BI on the IPO valu-
ation decreases with the firms age; in mature companies, the
marginal effect increases with the firms age. These results
are strongly supported at the single-country level for
Germany and Italy. However, we do not find statistical evi-
dence of a positive marginal effect of BI increasing with age
(coefficient of age squared) for French IPOs, possibly
because of the relative scarcity in our sample of mature
companies going public in that country (see Table 1).
Finally, we consider the robustness of our results across
different quartiles of Tobins Q using quantile regression.
To obtain estimations that account for the potential
endogeneity of the relationship between BI and Tobins Q,
we employ the estimator developed by Lee (2007), which
combines the control function approach with quantile
regressions. Table 7 presents the bootstrapped standard
errors obtained after 500 replications. Overall, our results
verify the effects of the interaction between BI and age on
the firms value. The impact of BI on IPO valuation is mod-
erated by age and age squared, with the expected signs and
acceptable statistical significance.
CONCLUSIONS
The innovative aspect of our study is that it explores the
relationship between the firms valuation and board struc-
ture across its life-cycle. Although several prior works have
studied the impact of corporate governance mechanisms on
IPO performance and valuation, we focus our attention on
how this relationship evolves as the company matures. We
rely on a large sample of firms going public in continental
Europe, where the firms going public are generally more
Volume 22 Number 2 March 2014
126 CORPORATE GOVERNANCE

TABLE 5
Effect of board independence on IPO valuation: robustness tests on the dependent variable

(1) (2) (3) (4)

Tobins Q (preliminary Tobins Q (first-day M/B ratio EV/Sales
offer price) closing price)

Board Independence 3.366** 3.259** 13.48*** 8.628**

(1.604) (1.644) (4.985) (3.393)
Board Independence Age .856** 1.031** 3.930*** 2.649***
(.433) (.438) (1.361) (1.015)
Board Independence Age2 .143** .170*** .586*** .406***
(.0580) (.0588) (.193) (.150)
Age .0854 .304 .713 1.547***
(.254) (.249) (.662) (.544)
Age2 .0522 .0212 .243* .200**
(.0473) (.0468) (.133) (.101)
V/C .174** .144 .695*** .389*
(.0748) (.0885) (.221) (.226)
C .00571 .00331 .00453 .0114
(.00409) (.00421) (.0109) (.00810)
Board Ownership .355 .354 .287 3.664***
(.248) (.258) (.685) (.553)
Board Size .0267 .0318 .132* .105*
(.0262) (.0275) (.0784) (.0615)
CEO Duality .690*** .843*** 1.568*** .790**
(.179) (.190) (.490) (.377)
Firm Size .723*** .719*** 1.127*** 2.340***
(.0473) (.0487) (.144) (.120)
Profitability .0926 .0268 .0129 1.177**
(.0947) (.110) (.467) (.475)
Leverage .0304** .0113 .0174 .212***
(.0144) (.0165) (.0701) (.0711)
Offer Size .0478*** .0358** .291*** .110***
(.0152) (.0161) (.0672) (.0356)
Offer Structure .116 .270 .208 1.470**
(.239) (.381) (1.068) (.598)
Underwriter reputation 1.073*** .900*** 1.531** 3.782***
(.227) (.231) (.608) (.479)
Market Momentum .933 1.676 7.562 2.578
(2.260) (2.378) (6.109) (4.477)
Accruals .308*** .271** .786*** .0376
(.112) (.118) (.220) (.258)
VC backing .358** .279 .667 .949**
(.182) (.189) (.493) (.377)
France .070 .304 2.097** .339
(.401) (.394) (.879) (.743)
Italy .135 .462 .927 1.033
(.406) (.392) .922 (.713)
Constant 15.852*** 16.674*** 25.397*** 42.201***
(1.102) (1.177) (3.913) (2.557)
Observations 969 969 969 969
Centered R-squared (2nd stage) .388 .371 .288 .536
Cragg-Donald Wald F statistic 138.800 138.800 138.800 138.800
[Stock-Yogo weak ID test critical [9.53] [9.53] [9.53] [9.53]
values: 5% maximal IV relative bias]
Hansen (endogeneity test) .485 .632 2.497 3.325
[Chi-sq(k) p-value] [.486] [.427] [.114] [.068]

This table reports the results of the 2SLS regressions, performed on the full sample of 969 European IPOs. The first stage is not reported for the sake of readability. In all cases, Board Independence and its
interactions are instrumented by Mimicking Behavior and its interactions with Age and Age2. Dependent variable are: Tobins Q calculated by replacing the offer price with the preliminary offer price (Model
1); Tobins Q calculated by replacing the offer price with the first-day price (Model 2); M/B ratio, defined as the ratio of market value of equity to the book value of equity (Model 3); and EV/Sales ratio, in
which EV is calculated as the sum of the book value of assets and the market value of common stock minus the book value of common stock (Model 4). Tobins Q is the ratio of the ratio of the market value
of assets (the sum of the book value of assets and the market value of common stock, based on the IPO offer price, minus the book value of common stock) to the book value of assets. Board Independence
is the percent of non-executive members on the board, as reported in the IPO prospectus. Age is the logarithm of one plus the age of the company in years. V/C is the ratio of the controlling shareholders
voting rights (V) to its cash-flow rights (C). C measures the controlling shareholders percentage ownership of the profits and dividends of the firm. If multiple chains of ownership exist, then the cash-flow
rights along each chain are the products of all ownership rights in the intermediate companies along that chain. The total cash-flow rights are equal to the sum of all cash-flow rights from all ownership chains.
V is computed as in La Porta et al. (1998). When multiple control chains exist, the voting rights are the sum of the voting rights along each chain with the weakest link among all holding layers. Board
Ownership (in percent) is measured as the ratio of total beneficial shares held by executive directors at year-end to the total number of shares outstanding at year-end. Board Size is the number of directors
on the board, including the chairperson. CEO Duality is a dummy indicating that the CEO and the chairman of the board of directors are the same person. Firm Size is the logarithm of net sales for the year
prior to the IPO date, adjusted for inflation. Profitability is the return on assets (in percent) in the year before the IPO. Leverage is debt over total assets (in percent) in the year before the IPO. Offer Size is
the ratio (in percent) between the size of the firm and the size of the offer. Offer Structure is the fraction (in percent) of secondary shares sold by existing shareholders relative to the total number of shares
offered. Reputation of the underwriter is equal to 100 when the underwriter is in the Carter-Manaster ranking (list taken from Jay Ritters website), and otherwise as equal to the underwriters percentage
market share in terms of number of IPOs underwritten in Europe during 1995 to 2011. Market Momentum is defined as the FTSE Euromid percentage index return calculated over the 6 months before the
offer date. Accruals is a measure of pre-IPO abnormal accruals computed following DuCharme et al. (2001). Mimicking Behavior is defined as the ratio of non-executive members in the BoDs of all the firms
belonging to the same industry (ICB code, first digit) and listed in the same stock market in the IPO year. Each regression controls for time, industry, and country effects (Germany is the omitted category).
Coefficients are omitted for the time and industry effects. Heteroskedasticity-robust standard errors are reported in brackets. ***, **, and * indicate significance levels below 1%, 5%, and 10%, respectively.

Volume 22 Number 2 March 2014 2014 John Wiley & Sons Ltd
BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION 127

TABLE 6
Effect of Board Independence on IPO Valuation: Sample Split by Time Period and Listing Market

(1) (2) (3) (4) (5)

Bubble Out of bubble France Germany Italy

Board Independence 6.246* 8.958*** 4.024*** .545** .989**

(3.772) (1.913) (1.368) (.265) (.461)
Board Independence Age 1.879* 2.254*** .603** .758*** 1.107***
(1.043) (.640) (.240) (.235) (.269)
Board Independence Age2 .319*** .275*** .070 .216*** .259***
(.131) (.104) (.053) (.0507) (.0671)
Age .156 .176 .880** .438 1.223**
(.479) (.267) (.386) (.322) (.527)
Age2 .160 .0174 .102 .152** .128
(.106) (.0489) (.0741) (.0689) (.0890)
V/C .732** .286*** .196* .0955 .0357
(.307) (.0849) (.102) (.512) (.168)
C .00158 .000503 .00507 .00259 .00665
(.00810) (.00467) (.00607) (.00536) (.0101)
Board Ownership .576 .562** .138 .275 1.143***
(.580) (.282) (.325) (.467) (.436)
Board Size .0451 .118*** .0221 .0497 .0287
(.0520) (.0296) (.0381) (.0431) (.0513)
CEO Duality .261 1.190*** .0614 .774** .298
(.325) (.211) (.232) (.360) (.305)
Firm Size .902*** .623*** .676*** .786*** .785***
(.0972) (.0561) (.0618) (.0978) (.107)
Profitability .176 .0469 .0722 .470 1.538
(.711) (.129) (.0971) (.459) (1.180)
Leverage 1.391 .0197 .0246 .0570 1.518*
(.991) (.0190) (.0191) (.0688) (.848)
Offer Size 1.486 .0208 .985 1.500** .0618**
(1.062) (.0156) (.648) (.626) (.0273)
Offer Structure .182 .567* 1.092*** .169** .367
(.474) (.295) (.321) (.0786) (.456)
Underwriter reputation 1.471*** .735*** .938*** .971*** 1.394***
(.387) (.267) (.342) (.324) (.373)
Market Momentum 12.85*** 1.610 1.540 3.249 2.707
(3.990) (2.430) (2.304) (3.796) (4.173)
Accruals .235 .236** .294 .0111 .614*
(.292) (.0989) (.381) (.107) (.371)
VC backing .0304 .383* .111 .630** .284
(.383) (.208) (.227) (.271) (.368)
France .054 .803**
(1.135) .338
Italy .163 .838**
(.641) .339
Constant 20.093*** 14.702*** 15.645*** 20.340*** 21.069***
(2.005) (1.244) (1.217) (2.078) (2.300)
Observations 289 681 428 383 158
Centered R-squared (2nd stage) .452 .370 .513 .416 .718
Cragg-Donald Wald F statistic 26.081 120.966 80.836 90.963 78.607
[Stock-Yogo weak ID test critical [9.53] [9.53] [9.53] [9.53] [9.53]
values: 5% maximal IV relative bias]
Hansen (endogeneity test) 10.980 13.584 5.117 8.508 11.281
[Chi-sq(k) p-value] [.004] [.002] [.023] [.003] [.001]

This table reports the results of 2SLS regressions in which Tobins Q is the dependent variable, performed on the full sample of 969 European IPOs. The first stage is not reported for the sake of readability.
In all cases, Board Independence and its interactions are instrumented by Mimicking Behavior and its interactions with Age and Age2. In Models (12), the sample is split between IPOs carried out during
the internet bubble (19992000) and all other periods. In Models (35), the sample is split according the reference market (Euronext, Frankfurt, or Milan). Board Independence is the percent of non-executive
members on the board, as reported in the IPO prospectus. Age is the logarithm of one plus the age of the company in years. V/C is the ratio of the controlling shareholders voting rights (V) to its cash-flow
rights (C). C measures the controlling shareholders percentage ownership of the profits and dividends of the firm. If multiple chains of ownership exist, then the cash-flow rights along each chain are the
products of all ownership rights in the intermediate companies along that chain. The total cash-flow rights are equal to the sum of all cash-flow rights from all ownership chains. V is computed as in La Porta
et al. (1998). When multiple control chains exist, the voting rights are the sum of the voting rights along each chain with the weakest link among all holding layers. Board Ownership (in percent) is measured
as the ratio of total beneficial shares held by executive directors at year-end to the total number of shares outstanding at year-end. Board Size is the number of directors on the board, including the chairperson.
CEO Duality is a dummy indicating that the CEO and the chairman of the board of directors are the same person. Firm Size is the logarithm of net sales for the year prior to the IPO date, adjusted for inflation.
Profitability is the return on assets (in percent) in the year before the IPO. Leverage is debt over total assets (in percent) in the year before the IPO. Offer Size is the ratio (in percent) between the size of the
firm and the size of the offer. Offer Structure is the fraction (in percent) of secondary shares sold by existing shareholders relative to the total number of shares offered. Reputation of the underwriter is equal
to 100 when the underwriter is in the Carter-Manaster ranking (list taken from Jay Ritters website), and otherwise as equal to the underwriters percentage market share in terms of number of IPOs
underwritten in Europe during 1995 to 2011. Market Momentum is defined as the FTSE Euromid percentage index return calculated over the 6 months before the offer date. Accruals is a measure of pre-IPO
abnormal accruals computed following DuCharme et al. (2001). Mimicking Behavior is defined as the ratio of non-executive members in the BoDs of all the firms belonging to the same industry (ICB code,
first digit) and listed in the same stock market in the IPO year. Each regression controls for time and industry dummies. Country effects are included in Models (12) (Germany is the omitted category).
Coefficients of time and industry effects are not reported for the sake of readability. Heteroskedasticity-robust standard errors are reported in brackets. ***, **, and * indicate significance levels below 1%,
5%, and 10%, respectively.

2014 John Wiley & Sons Ltd Volume 22 Number 2 March 2014
128 CORPORATE GOVERNANCE

TABLE 7
Effect of Board Independence on IPO Valuation: Quantile Regressions

Independent variables Quantile

.25 .50 .75

Board Independence 7.062*** 4.983*** 11.000***

(1.116) (1.239) (1.692)
Board Independence Age 1.447*** 1.200*** 2.943***
(.316) (.366) (.561)
Board Independence Age2 .165*** .164*** .489***
(.048) (.058) (.091)
Age .552*** 1.141*** .173
(.159) (.176) (.245)
Age2 .066** .126*** .093*
(.033) (.037) (.051)
V/C .059 .174** .294***
(.056) (.079) (.091)
C .002 .006* .010***
(.003) (.003) (.004)
Board Ownership .373** .304* .098
(.168) (.177) (.238)
Board Size .078*** .066*** .098***
(.020) (.022) (.031)
CEO Duality .616*** 1.180*** 1.317***
(.116) (.128) (.188)
Firm Size .551*** .749*** .732***
(.034) (.037) (.054)
Profitability .268*** .032 .361
(.085) (.133) (.384)
Leverage .056*** .017 .048
(.013) (.020) (.058)
Offer Size .038*** .007 .039***
(.008) (.009) (.012)
Offer Structure 1.021*** 1.842*** 1.670***
(.171) (.180) (.254)
Underwriter reputation .594*** 1.684*** 1.203***
(.136) (.155) (.219)
Market Momentum 5.941*** 4.597*** 3.740**
(1.397) (1.377) (1.826)
Accruals .081*** .033 .199***
(.031) (.074) (.073)
VC backing .346*** .751*** .995***
(.122) (.130) (.188)
France 1.001*** 1.528*** 1.821***
(.106) (.271) (.295)
Italy .779*** 1.258*** 1.809***
(.126) (.317) (.347)
Constant 10.916*** 16.951*** 16.340***
(.775) (.813) (1.162)
Observations 969 969 969

This table reports the results of quantile regressions on Tobins Q, performed on the full sample of 969 European IPOs. The control-function approach developed by Lee (2007) is used to control
for endogeneity. In each regression, Board Independence and its interactions are instrumented by Mimicking Behavior and its interactions with Age and Age2. Board Independence and its
interactions are instrumented by Mimicking Behavior and its interactions with Age and Age2. In Models (12), the sample is split between IPOs carried out during the internet bubble
(19992000) and all other periods. In Models (35), the sample is split according the reference market (Euronext, Frankfurt, or Milan). Tobins Q is the ratio of the ratio of the market value
of assets (the sum of the book value of assets and the market value of common stock, based on the IPO offer price, minus the book value of common stock) to the book value of assets. Board
Independence is the percent of non-executive members on the board, as reported in the IPO prospectus. Age is the logarithm of one plus the age of the company in years. V/C is the ratio
of the controlling shareholders voting rights (V) to its cash-flow rights (C). C measures the controlling shareholders percentage ownership of the profits and dividends of the firm. If multiple
chains of ownership exist, then the cash-flow rights along each chain are the products of all ownership rights in the intermediate companies along that chain. The total cash-flow rights are
equal to the sum of all cash-flow rights from all ownership chains. V is computed as in La Porta et al. (1998). When multiple control chains exist, the voting rights are the sum of the voting
rights along each chain with the weakest link among all holding layers. Board Ownership (in percent) is measured as the ratio of total beneficial shares held by executive directors at year-end
to the total number of shares outstanding at year-end. Board Size is the number of directors on the board, including the chairperson. CEO Duality is a dummy indicating that the CEO and
the chairman of the board of directors are the same person. Firm Size is the logarithm of net sales for the year prior to the IPO date, adjusted for inflation. Profitability is the return on assets
(in percent) in the year before the IPO. Leverage is debt over total assets (in percent) in the year before the IPO. Offer Size is the ratio (in percent) between the size of the firm and the size
of the offer. Offer Structure is the fraction (in percent) of secondary shares sold by existing shareholders relative to the total number of shares offered. Reputation of the underwriter is equal
to 100 when the underwriter is in the Carter-Manaster ranking (list taken from Jay Ritters website), and otherwise as equal to the underwriters percentage market share in terms of number
of IPOs underwritten in Europe during 1995 to 2011. Market Momentum is defined as the FTSE Euromid percentage index return calculated over the 6 months before the offer date. Accruals
is a measure of pre-IPO abnormal accruals computed following DuCharme et al. (2001). Mimicking Behavior is defined as the ratio of non-executive members in the BoDs of all the firms
belonging to the same industry (ICB code, first digit) and listed in the same stock market in the IPO year. Each regression controls for time, industry, and country effects (Germany is the
omitted category). Estimated coefficients of time and industry effects are not reported for the sake of readability. Bootstrapped standard errors obtained after 500 replications are reported in
brackets. ***, **, and * indicate significance levels below 1%, 5%, and 10%, respectively.

Volume 22 Number 2 March 2014 2014 John Wiley & Sons Ltd
BOARD INDEPENDENCE, OWNERSHIP AND IPO VALUATION
diverse than in the United States (Ritter, 2003). In our
sample, more than one-fourth (or one-third) of the IPO com-
panies in our sample were younger than 1 year old (or older
than 10 years old) at the time of listing. This great variety
among our sample allows us to study the role of the BoD
across many stages of maturity in the IPO companies.
In our study, the impact of BI on valuation (Tobins Q)
is investigated through the interaction with age, innova-
tiveness, and separation between ownership and control.
Control variables, such as the characteristics of the firm and
offering, are also incorporated into the model. A key finding
is that the effect of BI on firm value is U-shaped with age. In
young companies, the value-creation role of the BoD domi-
nates, and the impact of BI on firm valuation decreases with
firm age. In mature companies, the value-protection role of
the BoD dominates, and the impact of BI on firm valuation
increases with firm age. We also find that young and mature
companies are characterized by different factors that mod-
erate the impact of BI on the firms value. Measures of firm
innovativeness are crucial in terms of moderating the impact
of BI on IPO valuation for young companies (but not mature
ones). Meanwhile, the separation between ownership and
control is a critical moderating factor for mature companies
(but not young ones). This evidence is consistent with the
changing function of the BoD across the life-cycle of the
company, with a value-creation role being dominant in
young companies and a value-protection role being domi-
nant in mature ones.
This paper has relevant implications for empirical analyses
on the relationship between value and governance, whose
changing nature has not yet received sufficient attention in
the academic literature. Our findings have direct implications
for entrepreneurs who are contemplating an IPO and would
like to shape the process to their advantage. Investors and
financial market participants will find information regarding
the valuation of an asset class (IPO firms) that could deliver
large satisfaction, if we consider that the top 100 IPOs earned
over 1,000 percent in their first 3 years of trading (Field &
Lowry, 2009). Our research may be of interest to policy
makers, who are interested in setting best-practice standards
regarding board structure. Finally, regulators and corporate
governance advocates should consider the stage in the com-
panys life-cycle when recommending how boards should be
filled with non-executive members.
This study introduces the effect of the corporate life-cycle
into the study of the impact of corporate governance on the
valuation of IPOs, and thereby uncovers several avenues for
further research. For example, future work could build on
our findings to determine the impact of the corporate life-
cycle with reference to different industries and business
models. The impact of the firms age might vary across
industries and phases of the economic cycle. In particular,
the importance of rapid growth has increased over time in
many industries, due to the increasing speed of technologi-
cal innovation. As a result, profitable growth opportunities
may potentially be lost if they are not quickly seized. This
situation impacts both the decision to go public and the
relationship between age and valuation.
Additionally, whereas our study is based on a sample of
IPO companies, an alternative research setting might con-
sider the valuation impact of BI in seasoned firms. IPO com-
2014 John Wiley & Sons Ltd
129
panies tend to be relatively older in Europe than elsewhere,
which explains our choice of sample. However, IPO compa-
nies are, almost by definition, relatively younger than listed
companies. It would be interesting to extend our analysis to
a sample of listed companies, to explore BI in even older
companies than the ones we can observe in our sample.
Another potentially interesting aspect is the role played by
institutional factors in affecting the pace of evolution in the
role of the BoD. To this extent, extending the analysis to
countries outside continental Europe (especially market-
based economies) would be a valuable addition.
ACKNOWLEDGMENTS
We thank the editor Praveen Kumar, the associate editors of
the special issue Rajesh Chakrabarti and Douglas Cumming,
and two anonymous referees for their valuable and construc-
tive comments. We are grateful to Hisham Farag, William Q.
Judge, Erik Lehmann, Stefano Paleari, J. Ari Pandes, Shaker A.
Zahra, and all the participants to the workshop Global
Perspectives on Entrepreneurship: Public and Corporate
Governance held at the Schulich School of Business, York
University, Toronto (Canada). We also thank Mauro Seghezzi
for his precious research assistance.
NOTES
1. In contrast, empirical evidence about the link between corporate
governance and stock performance is much more nuanced.
Gompers, Ishii, and Metrick (2003) and Bebchuk, Cohen, and
Ferrell (2009) find evidence suggesting that better governance
translates into higher stock valuation and returns. After control-
ling for the endogeneity of corporate governance, Bhagat and
Bolton (2008) find no relationship between stock performance
and measures of corporate governance quality. Finally, Faleye,
Hoitash, and Hoitash (2011) and Fischer and Swan (2013)
provide evidence that excessive monitoring causes lower stock
returns.
2. See Vismara et al. (2012) for a description of the database.
3. In unreported regressions, we test the robustness of our results
when using a BI dummy that is equal to one for IPOs with BI that
is higher than the sample median of 57.1 percent, and zero
otherwise (Chahine & Saade, 2011). Overall, the results are con-
sistent with the ones shown here.
4. We find similar results when the offer characteristics are mea-
sured by the dilution ratio (new shares issued at listing over
market capitalization) and the participation ratio (percentage of
the IPO composed of existing shares).
5. The Carter-Manaster measure ranks underwriters based on their
placement in the IPO tombstone announcements, which are
marketing brochures in which banks deemed more reputable
appear above those considered less prestigious (Carter &
Manaster, 1990). This measure is not directly applicable to IPOs
in Europe, where underwriting syndicates are not as large, and
tombstone announcements do not exist. Its indirect applica-
tion overweights US banks and does not include underwriters
dealing only outside the United States. Therefore, the Carter-
Manaster rankings alone do not correctly measure the reputa-
tion of underwriters in most European IPOs. For this reason, we
rank the reputation of the underwriter as equal to 100 when the
underwriter is in the Carter-Manaster ranking (list taken from
Jay Ritters website), and otherwise as equal to the underwriters
percentage market share in terms of number of IPOs underwrit-
ten in Europe during 1995 to 2011.
Volume 22 Number 2 March 2014
130
6. Sample firms are categorized into 10 industries, according to the
first digit of the Industry Classification Benchmark, the official
industry classification adopted by the European stock
exchanges. The sample includes IPOs in the 19952011 period.
Therefore, firms are categorized in 17 IPO-years.
7. Ritter (2011) and Levis and Vismara (2013) provide reviews of
the literature on IPO pricing. See Jay Ritters website for current
data on the IPO activity across countries.
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Fabio Bertoni (PhD, CFA) is Associate Professor of Corpo-
rate Finance at the Department of Economics, Finance and
Control of EMLYON Business School (France). His research
activity focuses on the relationship between financing and
firm performance, new listings, sovereign wealth funds,
venture capital and corporate governance. He is author of
articles in journals such as: Journal of Banking & Finance,
International Finance, Technovation, Small Business Economics,
Research Policy, Venture Capital, and European Financial Man-
agement. He was visiting professor at the Copenhagen Busi-
ness School, Universidad Computense de Madrid, Centre
for European Economic Research (ZEW) in Mannheim, and
the University of Oxford Sad Business School.
Michele Meoli (PhD) is Assistant Professor of Corporate
Finance at the Department of Engineering, University of
Bergamo. He is a member of the CISAlpino Institute for
Comparative Studies in Europe (CCSE), University of
Bergamo and University of Augsburg. He was Marie Curie
Research Fellow at the Centre for Econometrics Analysis,
Cass Business School (City University London). His
research interests include corporate governance, IPO valua-
tion, academic entrepreneurship, and governance in higher
education systems.
Silvio Vismara (PhD) is Associate Professor of Corporate
Finance at the University of Bergamo, Italy. His research
activity is mainly on initial public offerings. Silvio is associ-
ate editor of Small Business Economics, member of the Edito-
rial Review Board of Entrepreneurship Theory and Practice,
and is author of articles in journals such as Entrepreneurship
Theory and Practice, Small Business Economics, European Finan-
cial Management, and Journal of Technology Transfer. He is
co-founder and co-director of the CISAlpino Institute for
Comparative Studies in Europe (CCSE). He is scientific
consultant for the Italian Stock Exchange and founder of
Universoft, a spin-off company from the University of
Bergamo.
Volume 22 Number 2 March 2014