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Going public is a strategic decision for an IPO firm. This move requires substantial effort
from top level management, including board of directors. One important facet of this process
is to design an effective governance system. Once the issuing firm decides to approach
investment bank and regulatory body for new issue, the promoter finds that the composition
and competency of board is crucial for getting successful subscription of the issue. Further,
board structure and financial interest are interlinked and dependent on each other. During
new issue mechanism, a lot of agency problems also arise regarding information disclosure
and value of the firm leading to more information asymmetry between insiders and outside
investors. Owing to unavailability of historical price information and even limited access to
other information (even if at all it might have an additional cost), investors are constantly
relying on various signaling factors, i.e., investment bank prestige, post-issue promoter group
retention, auditor reputation, parent group affiliation, and venture capitalist support to
make an assessment about the quality of the issue. More recently, Certo et al. (2001), Filatochev
and Bishop (2002), Certo et al. (2007), Mnif (2009), and Gao and Jain (2011) evaluated
signaling effect of corporate governance board to resolve issues related to IPO pricing and
performance.
Formal certification hypothesis was first presented by Booth and Smith (1986).
Subsequently, a series of models have been developed to explore other certification of
attestation of quality for IPOs. Certification in IPOs has been studied primarily from the
angle of reputation of underwriters (Carter et al., 1998) and venture capitalists’ affiliation
(Megginson and Weiss, 1991; and Lee and Wahal, 2004) associated with an issue. Carter et al.
(1998) find lesser underpricing for IPOs sponsored by reputed underwriters. Marisetty and
Subrahmanyam (2005) used business group affiliation to evaluate pricing of IPOs. Loughran
and Ritter (2004) considered underwriter prestige, and Beatty (1989) used auditor reputation
as additional certification of quality for issue. Existing studies found using a number of other
certification as signaling, i.e., relationship with banks (James and Weir, 1990), institutional
association (Hamao et al., 2000), and management quality (Chemmanur and Paeglis, 2005).
These studies suggest that certification instruments help to resolve information asymmetry
among investors and hence reduce pricing error. Board structure and its characteristics are
also perceived as an additional certification of attestation of quality for potential investors
(Marshall, 1991; and Finkle, 1998).
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