Managerial Agents Watching Other Agents: Multiple Agency Conflicts regarding Underpricing in IPO Firms

• Published in: Academy of Management journal Vol. 51; no. 2; pp. 277 - 294
• Main Authors: Arthurs, Jonathan D., Hoskisson, Robert E., Busenitz, Lowell W., Johnson, Richard A.
• Format: Journal Article
• Language: English
• Published: Briarcliff Manor Academy of Management 01-04-2008
• Subjects: Agency theory; Boards of directors; Business structures; Business studies; Capitalism; Capitalization; Conflicts of interest; Corporate finance; Financial management; Financing methods; Initial public offering; Initial public offerings; Investment bankers; Investment banking; Investment banks; Investment horizon; Investors; Management science; Musical agency; Principal-agent theory; Punitive damages; Stock prices; Studies; Venture capital; Venture capital companies; United States > US
• ISSN: 0001-4273; 1948-0989
• DOI: 10.5465/amj.2008.31767256

We contribute to multiple agency theory by examining cases in which ventures making initial public offerings (IPOs) have managerial agents on their boards whose goals conflict with those of the investment bank agents hired to underwrite the stock. Underwriters have an incentive to underprice IPOs to maintain strong ties with institutional investors. We develop theory on agent differences based on time horizons and risk taking by managerial agents as framed through behavioral agency theory. Examining governance mechanisms, we find both monitoring by board insiders and board experience decrease underpricing. Furthermore, underpricing increases when venture capitalists have prior ties with underwriters.