Initial Public Offering (IPO) is the critical point in ensuring investors’ participation when a private firm goes public. The potential shareholders would hesitate to invest in the firm coming to the market with IPO unless it has strong corporate governance mechanisms in place. The IPO firms are therefore required to favorably influence the perception of the investors by signaling the potential and governance capability of the firm. The board of directors is the most important and visible corporate governance mechanism available to the potential shareholders at the time of IPO. The first paper, “The Effect of Board Size on Underpricing of IPOs: Indian Evidence”, by Rekha Handa and Balwinder Singh, studies the relationship between board size of IPO firms and underpricing, controlling for other variables documented in literature as influencers of IPO performance. The study considers the firms that made IPOs between 2002 and 2012 and are listed on Bombay Stock Exchange. A sample of 395 IPO firms was considered based on data availability. The results of the regression analysis indicate that board size influences investors’ perceptions and hence the performance of IPO. Board independence, however, has not been found to provide a significant explanation for IPO initial returns, implying thereby that Indian investors are not influenced by the percentage of independent directors as long as they comply with SEBI norms.

One of the important tasks of the board is to ensure that the other governance mechanisms work well and communicate about the same to the investors. Initially, the firms communicated to the investors through annual reports. Later, they started communicating through the print media and also through stock exchanges. The advent of technology made communication with investors easier through the Internet, particularly through company websites. Literature on corporate governance and disclosure also focused on the effect of the new media on investor communication, which came to be known as Internet Financial Reporting (IFR). Most of the research in this field has focused on developed Anglo-American nations like the US and UK and very limited work has been done in the context of developing economies. The second paper, “Corporate Financial Reporting on the Internet: A Survey of Websites of Listed Companies in Pakistan”, by Zainab Alam and Kashif Rashid, attempts to reduce the research gap. It empirically analyzes the Internet-based financial reporting practices of Pakistani firms listed on Karachi Stock Exchange and studies the impact of the regulatory notification issued in 2012 by the Securities and Exchange Commission of Pakistan (SECP) on the financial reporting environment. The findings of the content analysis-based study indicate wide variation in the quality of reporting through the company websites among the listed Pakistani firms. Overall, the results indicate that Pakistani firms are yet to reach the global standards in financial reporting through the Internet. They are yet to make use of the full potential of the Internet in disseminating financial information through charts and graphs, along with traditional methods.

The relationship between Executive Compensation (EC) and ownership structure has been an important topic of research in the corporate governance literature, though there are still plenty of research gaps. The results of the existing studies on the topic are mixed in terms of the exact effect of ownership structure on EC across the countries. The third paper, “Options Are a CEO’s Best Friend: Executive Compensation in Swedish Listed Corporations”, by Sven-Olof Yrjö Collin, Lina Gustafsson, Emma Petersson and Elin Smith, focuses on this topic in the Swedish context. The paper analyzes the influence of ownership on both the level and composition of EC by adding the identity of the owner and the owner’s capacity to create a governance strategy to the traditional ownership concentration measure. The paper identifies the owner groups into four categories, namely, family investors, industrial investors, institutional investors and foreign owners. The results indicate that the identity of the owners, and therefore their characteristics as expressed by governance strategy, matters when it concerns the level of EC, but not the composition of EC. It is also observed that the propensity to use options in the compensation package is related to ownership dispersion and CEO share ownership. The results, according to the authors, indicate that the ‘options’ as an EC component could be treated more as the CEO’s best friend than as the owner’s friend.

-- S Subramanian
Consulting Editor