The Role of Founder-CEOs and Founder-Families in IPOs

This paper shows that in large U.S. companies, founder-CEO and founder-family controlled firms experience about 10 percent more underpricing relative to non-founder firms during the IPO process. This result holds after controlling for the ownership of founders and is consistent with the value-destroying behavior of founders. That is, founder-CEOs often consider their firms as their life's achievement and thus try to push their IPOs through by bargaining less aggressively with investment banks. Moreover, this paper shows that the partial adjustment phenomenon is weaker for firms that are controlled by founder-CEOs at the time of IPOs, supporting Loughran and Ritter's (2002) prospect theory (behavioral) explanation on this effect. Finally, large U.S. companies controlled by founders' descendants during the IPO process on average experience less underpricing, in contrast to founder-CEO firms. This opposite result on descendant-CEOs is also consistent with the theory that founder-CEOs try to push their IPOs through because they consider their firms as life's achievement. Keywords: founder-CEOs, family firms, IPOs, underpricing, partial adjustment JEL classification: G24, G32, G34
We are grateful to Brett Myers and lack Cooney for their help and encouragement on this project, and to Murali Jagannathan for sharing the private dataset. We thank an anonymous [...]