Board of Directors and Initial Public Offerings in Unregulated Financial Markets: Evidence From Belgium a Century Ago

Research Question/Issue: At the turn of the 20th century, firms raised capital in a highly unregulated market characterized by severe information asymmetries and weak legal protection. In such a context, does the board of directors (BOD) play a significant role? If so, how?. Research Findings/Insights: We examine the relationship between the size and structure of the BOD and the market valuation and long-term performance of 668 initial public offerings (IPOs) on the Brussels Stock Exchange from 1890 to 1914. Consistent with hypotheses based on agency theory and resource dependence theory, we document an inverted U-shaped relationship between the size of the BOD and IPO valuation. Exploiting the BOD dual structure of Belgian firms, we reveal that the ratio of executive to supervisory board size influences the IPO long-term performance. Firms with a greater number of executive board members relative to supervisory board members are more likely to delist within 5 years of the IPO and exhibit lower buy-and-hold returns. The role of BOD is more pronounced for IPOs that are more likely to suffer from information asymmetry. Theoretical/Academic Implications: Research on BOD has predominantly focused on contemporary and regulated contexts or on large companies. By investigating the relationship between the BOD and IPOs from a historical perspective, we document that corporate governance matters for both short-term and long-term IPO prospects in a context of unregulated financial markets, very poor investor protection, and high information asymmetry. Practitioner/Policy Implications: Our results suggest that BOD is critical when investors cannot rely on regulation to cope with poor information and protection. While investors consider the size of the BOD at the time of the offering, they should also pay attention to its structure, as it strongly influences the firm's long-run performance.