The best of both worlds: Can founder-CEOs overcome the rich versus king dilemma after IPO?

Abstract

Research Summary:To prevent loss of control post-IPO, founder-CEOs can implement control-enhancing mechanisms disconnecting ownership from voting rights. However, this decision places them in arichversuskingdilemma. If they choose to implement such mechanisms and secure thekingposition, they risk losing money at IPO. If they choose not to implement control-enhancing mechanisms and adopt therichposition they risk losing control over the firm. We investigate theoretically and empirically the outcomes of this dilemma in a multi-period setting (at IPO and post-IPO). We found that the majority of founder-CEOs who choose thekingoption recover initial wealth loss, and hence, they can reconcile therichandkingpaths in the long-run post-IPO. Managerial Summary:Founder-CEOs often use control-enhancing mechanisms (CEMs), such dual class shares, pyramid control structures, and pact agreements, to maintain control over their IPO firms. In this study, we investigate the effects of these CEMs on firm value at IPO and post-IPO using a unique hand-collected dataset comprising all founder-CEO led firms that went public on French regulated markets between January 1992 and December 2010. We found that most founder-CEOs who use multiple CEMs leave considerable amounts of money on the table at IPO date but they are able to recover their initial loss 5 years post-IPO. This result suggests that an IPO may constitute a valuable financing alternative even for founder-CEOs who value control.