Too Much of a Good Thing? Board Independence and the Value of Initial Public Offerings
| Published date | 01 April 2023 |
| Author | Fabio Bertoni,Michele Meoli,Silvio Vismara |
| Date | 01 April 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12634 |
British Journal of Management, Vol. 34, 942–972 (2023)
DOI: 10.1111/1467-8551.12634
Too Much of a Good Thing? Board
Independence and the Value of Initial Public
Offerings
Fabio Bertoni,1Michele Meoli2and Silvio Vismara3
1SKEMA Business School – University Côte d’Azur, 5 Quai MarcelDassault, 92150 Suresnes (France),
Bergamo, Italy, 2Michele Meoli, Department of Management, Information and Production Engineering,
University of Bergamo, Bergamo, via Pasubio 7b, 24044, Dalmine (BG), Italy, and 3Department of
Management, University of Bergamo, via dei Caniana 2, Bergamo, 24127, Italy
Corresponding author email: silvio.vismara@unibg.it
Building on agency and resource dependence theories, we study the relationshipbetween
the value of initial public offerings and the extent of board independence, which we nd
to be an inverted U-shape: beyond a certain threshold, board independence becomes ex-
cessive. Consistent with agency theory, the inverted U-shaped relationship is more pro-
nounced when ownership and control rights are separated. Consistent with resource de-
pendence theory, the inverted U-shaped relationship is more pronounced in companies
with higher industry diversication and less pronounced when the roles of the CEO and
president of the board of directors are separated.
Introduction
In this study,we examine how board independence
affects the value of initial public offerings (IPOs).
We build on two complementary theories of the
board of directors (BOD): agency theory and
resource dependence theory. These two theories
focus on two different roles played by the BOD:
monitoring and advising (Huse, 2005). Agency
theory considers the BOD mostly as a monitor-
ing tool (Fama and Jensen, 1983; Hermalin and
Weisbach, 2001; Jensen and Meckling, 1976). The
BOD veries whether the management of the
company acts in the interest of the shareholders
and exerts sufcient effort to maximize the value
of the company without extracting private benets
from it. Resourcedependence theory instead views
the BOD as an integral component of the effec-
tive rm, which is used to gain access to scarce
resources and information (Boyd, 1990). The con-
tribution of BODs to the value of IPOs requires
integrating these two theories: boards both mon-
itor and provide resources, and both are related to
rm performance (Hillman and Dalziel, 2003).
Both agency and resource dependence theories
argue that board independence plays a key role
in determining BOD functioning. Whereas agency
theory contends that independent directors will be
better monitors because of their independence, re-
source dependence theory argues that independent
directors are those that are most effective in bring-
ing competencies, skills and a network of con-
tacts to the company that it would not otherwise
possess. In summary, independent directors are a
‘good thing’ for both monitoring and advising,
which should result, other things being equal, in a
positive relationship between board independence
and rm value.
The fact that regulators in many countries have
started pushing companies to increase the number
of independent directors on their boards (Faleye
and Hoitash, 2011; Zattoni and Cuomo, 2010) has
fuelled the interest in the literature about when
board independence could actually become ‘too
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British Academy
of Management.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distri-
bution and reproduction in any medium, provided the original work is properly cited.
Too Much of a Good Thing? 943
much of a good thing’. Both agency and resource
dependence theories provide mechanisms for ex-
cess board independence.According to agency the-
ory, monitoring can become excessive and cause
short-termism and inertia, which will eventually
reduce the value of the rm (Faleye and Hoitash
and Hoitash, 2011). According to resource depen-
dence theory, excessboard independence results in
a cacophony of advices, which dilutes the manage-
ment’s attention and reduces its decision-making
abilities (Krause and Bruton, 2014).
The benets and costs of monitoring and ad-
vising act as additive latent mechanisms (Haans,
Pieters and He, 2016), resulting in an inverted U-
shaped relationship between IPO value and board
independence. The literature has mostly studied
one important characteristic of this relationship:
the turning point corresponding to where the
marginal costs of board independence equal its
marginal benets, which is the optimal level of
board independence. However, we argue that a
better understanding of the costs and benets
of board independence can be obtained by more
generally analysing the structural form of this
relationship rather than by focusing only on its
turning point. Following Haans, Pieters and He
(2016), rather than just focusing on shifts of the
turning point, we study whether the inverted U-
shaped relationship between board independence
and IPO value attens or steepens according to
what is predicted by agency and resource depen-
dence theories.
Studying the shape of the relationship between
IPO value and board independence allows us to
understand not only how some factors may affect
the optimal share of independent directors on the
board, but also how a deviation from optimality
may be more or less harmful depending on the cir-
cumstances, and what a rm can do to reduce this
sensitivity. This contribution is particularly impor-
tant because although boards are endogenously
determined to maximize rm value (Hermalin and
Weisbach, 2001), attrition may cause signicant
deviations from optimality. These deviations may
be more or less detrimental, depending on the
shape of the relationship between value and board
independence.
This work directly contributes to the literature
on corporate governance and IPO valuation,
but it also indirectly adds to the much larger
debate about the relationship between corporate
governance and equity value and returns (e.g.
Chhaochharia, and Grinstein, 2007). The focus
on IPOs allows us to consider companies that
because of their hybrid nature are extremely inter-
esting from a corporate governance perspective.
Although corporate governance does not follow
a deterministic life-cycle (Wirtz, 2011), it tends
to gain clarity as companies open up to exter-
nal shareholders (Lang and Wirtz, 2022). IPOs
tend to be at the fundamental strategic thresh-
old between value creation and value protection
(Filatotchev, Toms and Wright, 2006; Hülsbeck,
Meoli and Vismara, 2019). In the value-creation
phase, resource dependence theory is likely to
dominate, and the board’s objective will mostly be
to advise managers. In the value-protection phase,
the board’s objective changes to monitoring, and
agency theory applies. Hence, both theories will
likely applyto companies at the threshold between
these two strategic phases, such as in IPOs. This
is a suitable setup for our study because we aim to
analyse how factors considered under both these
theories affect the relationship between a rm’s
value and board independence.
The remainder of this paper proceeds as fol-
lows. In the section ‘Literature and hypotheses’,
we develop our hypotheses. We describe our sam-
ple and methodology in the section ‘Data and
methodology’. The analysis results are presented
in the section ‘Results’. Finally, in the section ‘Dis-
cussion and conclusions’, we discuss the results
and conclude the paper.
Literature and hypotheses
Board independence in IPOs
IPOs are an interesting setting for this research.
At the time of the IPO, the rm’s corporate gover-
nance is clearer than at anyother point in the rm’s
history (Bruton et al., 2010). In preparing for an
IPO, various actors (such as founders, early-stage
equity investors and underwriters) shape gover-
nance mechanisms. For the rst time, the company
opens its ownership structure to external public
investors. Therefore, upon listing, the availability
and reliability of company data increase substan-
tially, allowing us to assess their governance and
value.
The study of IPOs addresses the formation of
governance mechanisms, specically BOD inde-
pendence, and the rationale forthose mechanisms.
Such mechanisms are intended to meet the needs
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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