Managerial Agents Watching other Agents: Multiple Agency Conflicts Regarding Underpricing in IPO Firms

Abstract

We contribute to multiple agency theory by examining cases in which ventures making initial public offerings (IPOs) have managerial agents on their boards whose goals conflict with those of the investment bank agents hired to underwrite the stock. Underwriters have an incentive to underprice IPOs to maintain strong ties with institutional investors. We develop theory on agent differences based on time horizons and risk taking by managerial agents as framed through behavioral agency theory. Examining governance mechanisms, we find both monitoring by board insiders and board experience decrease underpricing. Furthermore, underpricing increases when venture capitalists have prior ties with underwriters.