British Journal of Management, Vol.

21, 666–683 (2010)

DOI: 10.1111/j.1467-8551.2010.00707.x

To IPO or Not To IPO: Risks, Uncertainty

and the Decision to Go Public
Scott Latham and Michael R. Braun1
University of Massachusetts – Lowell, College of Management, 1 University Avenue, Lowell, MA 01854, USA,
and 1University of Montana – Missoula, School of Business Administration, Gallagher Business Building,
32 Campus Drive, Missoula, MT 59812, USA
Email: scott_latham@uml.edu; michael.braun@business.umt.edu

We employ three views of agency theory in unison to investigate managerial risk-taking

in uncertain markets. Using 124 firms that filed to go public toward the end of the
technology boom (2000–2002), we explore the influence of CEO ownership on the
decision to continue or withdraw an initial public offering (IPO) in deteriorating public
equity markets. We find an inverse U-shaped relationship between CEOs’ equity
participation and the decision to proceed with a public offering: the probability of IPO
cancellation in weak capital markets increases as CEOs hold too little or too much
ownership. Our results also indicate that a firm’s debt levels are positively linked with
the IPO decision. CEO ownership and leverage intensity interact to influence the
decision to take a firm public.

Introduction Benveniste and Guo, 2001, p. 100). That is, after

A firm’s initial public offering (IPO) is deemed to
be one of the most important milestones in
an organization’s lifecycle (Andrews and Wel-
bourne, 2000; Dunbar and Foerster, 2007;
Khurshed, 2000; Nelson, 2003; Pagano, Panetta
and Zingales, 1998). For one, to engage in IPO
signals the firm’s need for additional resources to
grow and prosper (Nelson, 2003). Furthermore,
when firms move to public ownership, they also
provide current investors, along with founders
and other top management, a liquidity event, or
the opportunity to ‘cash out’ (Wasserman, 2006;
Zingales, 1995). Nevertheless, not all firms
succeed in realizing their planned IPO. In fact,
failed IPOs are an increasing phenomenon in
today’s US capital markets, with approximately
20% of firms withdrawing from their planned
transition from a private to a public company
(Dunbar and Foerster, 2007).
The overwhelming reason attributed to IPO
withdrawals by finance scholars is a ‘discontent
with investor reception of its IPO’ (Busaba,
attempting to price the stock in a process known
as ‘bookbuilding’, firms faced with a soft demand
for the issue from institutional investors can and
do engage in the option to abandon offering
(Benveniste et al., 2003; Brau and Fawcett, 2006;
Busaba, 2006; Busaba, Benveniste and Guo,
2001). Nevertheless, IPO withdrawals come at a
cost. In addition to incurring unrealizable ex-
penditures related to the filing (accounting audits,
road shows etc.), the firm may also potentially
weaken its long-term competitive advantage and
thus its survival. For one, the cancellation can
provide bad publicity to critical stakeholders,
including customers, suppliers and other poten-
tial financial sources (Guo, 1998; Lerner, 1994).
Furthermore, the firm forgoes the capital pro-
ceeds from the IPO necessary for strategic growth
initiatives (innovation, acquisition etc.). As such,
the decision to abandon a public offering can
have as significant an impact on the firm and its
shareholders as proceeding with it.
While a handful of scholars have explored the
IPO withdrawal phenomenon, their research

r 2010 British Academy of Management. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford
OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
To IPO or Not To IPO
focus remains predominantly on the environ-
mental factors that influence the cancellation of a
public stock issuance. Few studies to date,
however, have attended to the impact of manage-
rial variables on the probability to withdraw an
offering. Given the potentially significant con-
sequences to the firm of abandoning a planned
IPO, it is important to distinguish between the
personal risks borne by management and the
risk-bearing by other stakeholders. Because pre-
vious research (cf. Hill and Snell, 1989; Palmer
and Wiseman, 1999; Tan and Peng, 2003; Wise-
man and Gomez-Mejia, 1998; Zahra, Newbaum
and Huse, 2000) has highlighted the need to make
explicit distinctions between managerial and
organizational risk since risks inherent in certain
types of investment decisions may differentially
reward or punish the firm versus its managers,
management’s decision to pull an IPO may be
influenced by what they stand to personally gain
or lose from that particular decision. In the case
of failed IPOs, we maintain that CEOs’ personal
risk profiles in terms of their ownership stake in
the firm can influence the choice to withdraw.
Thus, in this study, we attempt to enhance the
IPO and governance literature by exploring
managers’ risk considerations and their impact
on the decision to continue with a filed IPO in the
light of deteriorating conditions in the capital
markets. To do this, we rely on agency theory
(Jensen and Meckling, 1976) and behavioural
agency theory (Wiseman and Gomez-Mejia,
1998) to focus on managerial wealth connected
to the CEO’s equity holdings, perceptions of
related risk and the decision-making outcome.
The decision to proceed with IPO in uncertain
markets is incomplete without consideration of
organizational risk, or the risks borne by other
stakeholders in the firm. We therefore pay
attention to a particular organizational risk
factor – a firm’s debt levels – that may
differentially induce decisions to withdraw from,
or proceed with, an IPO. In the context of IPOs
especially, tensions between what is best for the
CEO, as entrepreneur-manager, and what is best
for the firm in general may be particularly
amplified. Whereas CEOs base their short-term
decision making on the upside potential of their
equity claims (Jensen and Meckling, 1976), these
decisions can undermine the organization’s long-
term competitive advantage. As such, CEOs
foreseeing a weak opportunity to cash out may
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667
decide to pull their firm’s public offering at the
expense of other stakeholders, as well as the
future competitiveness of the company. In con-
sidering these potential conflicts within the
context of the going-public process, we therefore
attend to the following questions. To what
extent, if at all, do managerial risk and organiza-
tional risk, separately and in combination, relate
to the decision to continue with or cancel a
planned IPO?
To gain insight into the range of managerial
risk considerations and subsequent decision
making, we examined the firm’s decision to
proceed with, or withdraw from, IPO in a sample
of 124 Internet firms in the wake of the 2000–
2002 technology downturn. We chose this context
for the following reasons. First, because manage-
rial ownership incentives were an important
aspect of managerial compensation during the
technology boom of the late 1990s (Bryan,
Hwang and Lilien, 2000; Ittner, Lambert and
Larcker, 2003), this particular environment am-
plifies managers’ risk considerations as they
attempt to achieve personal wealth gains through
IPO. Second, from an organizational perspective,
the associated reduction in environmental muni-
ficence impacted a firm’s ability to access critical
resources in the external environment, making
the proceeds from IPO vital to the firm and its
stakeholders. Finally, we believe this particular
context offers not only a theoretically coherent
understanding of the interplay between manage-
rial ownership and organizational risk considera-
tions on strategic decision making, but also an
observation into managerial behaviour during a
unique period in our recent economic history.
Our theoretical contribution with this study
concerns our inclusion, in unison, of three
agency-theoretic considerations of managerial
risk, Agency Problem I, i.e. traditional agency
theory (Jensen and Meckling, 1976; Villalonga
and Amit, 2006), Agency Problem II, or the
expropriation of minority shareholders by domi-
nant owners of the firm (Morck, Shleifer and
Vishny, 1988; Villalonga and Amit, 2006), and
behavioural agency theory (Wiseman and Go-
mez-Mejia, 1998). Recent examinations on the
agency conflict have become increasingly frag-
mented by applying the best-fitting agency lens
on distinct organizational structures (e.g. Agency
Problem I on the widely held firms, Agency
Problem II on majority-owned firms, risk-con-
668
textualized compensation and ownership for
behavioural agency theory), as well as particular
organizational forms (e.g. public versus private
firms, leveraged buyouts, family-controlled firms,
employee stock ownership plans etc.). However,
we maintain that many firms contain aspects of
all three agency problems and as such can be
better scrutinized and understood using the entire
spectrum of agency conflicts simultaneously. To
our knowledge, only the study by Wright et al.
(2007) has to date relied concurrently on all three
agency perspectives, albeit in the context of large
firms’ innovation investment behaviour. Our
study makes explicit a need to disentangle
managerial risk considerations from those of
the firm, in our case by considering the differ-
ences in CEOs’ risk–return preferences under
varying circumstances. Furthermore, we extend
behavioural agency theory by attending to the
risk profiles of owner-managers. While beha-
vioural agency theory pays attention to the
decision-making dynamics of agents facing loss
aversion, the theory remains ambiguous in situa-
tions where owner-managers, as principals, place
at risk their equity in the firm.
Our study reads as follows. In the next section,
we frame our discussion by integrating various
theoretical fundamentals from agency and beha-
vioural agency theory. We also revisit the extant
literature on IPOs and the inherent risks to
managers therein to subsequently develop our
hypotheses. The sample, variables and methodol-
ogy are discussed in the following section,
followed by a presentation of empirical results.
Finally, we discuss of our findings, implications
thereof, and offer directions for future research.
Theoretical foundation
As the default theory to examine and explain
governance mechanisms inherent in the modern
corporation, agency theory works with the
premise of inevitable conflict between parties
that control firm resources (managers) and those
who own them (shareholders) (Jensen and
Meckling, 1976). The classic agency problem
(Agency Problem I) occurs when principals
(owners) attempt to align the interests of agents
(managers) with their own in view of different
goals and risk preferences. As these differences
grow, so do the agency costs of structuring,
S. Latham and M. R. Braun
monitoring and bonding contracts to address the
basic conflict in goals and risk preferences of self-
interested parties. Eventually, shareholders bear
the loss as costs of governance outweigh the
benefits of contracts that bring the parties
together (John, 1993). As a solution to these
costs, agency theorists propose a set of controls
that can mitigate managerial self-interest and
reconcile goals between managers and share-
holders (Fama and Jensen, 1983; Jensen and
Meckling, 1976). These controls include separat-
ing CEO and chairperson, or duality positions
(Boyd, 1995), decreasing board size (John and
Senbet, 1998; Johnson, Hoskisson and Hitt,
1993), administering regular board meetings with
senior management (Zahra and Pearce, 1989) and
empowering top management team members
other than the CEO (Brunninge, Nordqvist and
Wiklund, 2007). However, possibly the most
examined agency device remains firm ownership
by which managers are transformed into partial
shareholders with significant equity claims tied to
the success of the firm. In this way, equity
participation functions to alter managers’ pench-
ant for risk toward resource allocations that
maximize corporate value (Jensen, 1986). In
other words, ownership ensures that managers
engage in more risk-laden strategic decisions that
enhance not only their own wealth but, in turn,
that of all the firm’s shareholders (Burkhart and
Panunzi, 2006; Eisenhardt, 1989; Fama and
Jensen, 1983; Jensen and Meckling, 1976; Shleifer
and Vishny, 1997; Wiseman and Gomez-Mejia,
1998).
There is considerable empirical evidence that
managerial equity participation is directly linked
to risk-seeking behaviour to the benefit of firm
shareholders (Carpenter, Pollock and Leary,
2003; Cho, 1998; Denis, Denis and Sarin, 1997;
Rajagopalan, 1997; Reuer and Miller, 1997; Roth
and O’Donnell, 1996; Tosi, Katz and Gomez-
Mejia, 1997). These studies have examined the
effect of increased management ownership on a
wide range of strategic decisions, including
diversification, innovation and internationaliza-
tion, and while they generally support participa-
tive equity prescriptions to Agency Problem I,
another stream of research makes the case for
agency costs arising from the presence, rather
than the absence, of firm ownership (Villalonga
and Amit, 2006; Wiseman and Gomez-Mejia,
1998; Wright et al., 2002). In this contrasting
r 2010 British Academy of Management.
To IPO or Not To IPO
view of ownership’s positive governance func-
tion, firms are susceptible to agency costs because
managers hold too much ownership in the firm
(Shleifer and Vishny, 1997; Villalonga and Amit,
2006). The Agency Problem II argument is that
large ownership positions can make management
more entrenched and less subject to market
discipline, thereby giving rise to a ‘hold-up’ by
controlling shareholders at the expense of non-
controlling minority shareholders (Gomez-Mejia,
Nunez-Nickel and Gutierrez, 2001). Further-
more, in contrast to the Agency Problem I view
that increased equity participation leads to better
firm performance, these researchers maintain that
owner-managers become risk averse since they
cannot diversify their firm-coupled wealth. As
such, they may opt to extract private benefits at
the expense of overall corporate value and, ipso
facto, minority shareholders.
To balance these polarized views on the role of
ownership in managing agency conflict, Wiseman
and Gomez-Mejia (1998) introduce a behavioural
agency model (BAM) to argue that manage-
ment’s propensity for risky decisions differs
depending on their problem-framing and risk-
bearing. Whereas managerial risk remains con-
sistent under precepts of traditional agency
theory, BAM relaxes these assumptions to con-
sider varying risk preferences and subsequent
risk-taking. The implications of BAM are that
managers evaluate outcomes against some refer-
ent point, subsequently becoming risk averse
when outcomes are above that particular refer-
ence point (i.e. a domain of gains), but increas-
ingly risk-seeking when outcomes fall below the
reference point (i.e. a domain of losses). Thus,
when viewed through the BAM lens, the relative
benefits and disadvantages of managerial owner-
ship are conditioned on the risks borne by agents
under certain circumstances.
As the short review of agency and behavioural
agency considerations of managerial risk sug-
gests, the value of ownership as a governance
mechanism is not an either–or proposition. The
agency view of organizational risk is similarly
ambiguous – aside from decisions and outcomes
relating to managerial interests, the theory also
addresses risks associated with the organization
and its other stakeholders, capturing this risk in
the form of firm leverage or debt (Jensen and
Meckling, 1976; Wiseman and Catanach, 1997).
Whilst neoclassical precepts of capital structure
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669
hold that the sourcing decision between equity
and debt is immaterial to valuing the firm (e.g.
Modigliani and Miller, 1958), agency theorists
suggest that the use of leverage keeps in check
managerial opportunism (Jensen, 1986). Here,
the argument is that because managers bear the
consequences of overall firm risk (Bowman, 1982;
Jensen, 1986), they generally engage in strategic
options with lower risk consequences at the
expense of maximizing firm performance and
owners’ wealth. That is, managers tend to make
resource allocations with negative present value
projects, including excessive diversification (Mer-
ino and Rodriguez, 1997), empire building and
on-the-job shirking (Tan and Peng, 2003). These
resource allocations, in turn, diversify managers’
personal risks, thus allowing them to reap
benefits that include higher remuneration and
increased job security (Eisenhardt, 1989). As a
governance control, therefore, the use of leverage
refocuses managers’ efforts away from self-
serving activities towards those investments
generating cash flows necessary to repay its
obligations (Jensen and Meckling, 1976). Never-
theless, in following the impact of debt on firm
behaviour, Wright et al. (2000) and others argue
that debt can ‘crowd out’ innovative and
entrepreneurial opportunities or constrain vital
R&D investments. In this way, an overreliance
on leverage can lead to competitive disadvantage,
thereby putting at risk the firm and its stake-
holders. From an agency perspective, for these
reasons, the extent to which debt provides an
incentive or a threat remains under question.
Given this brief deliberation of agency-related
concerns involving managerial and organiza-
tional risks, it is clear that for companies seeking
to go public in weak capital markets, information
asymmetries and their related tensions between
certain IPO participants may prove particularly
problematic. For one, what may benefit the CEO
seeking to cash out her or his venture-linked
wealth may not be in the best interest of the
organization and its other stakeholders. Specifi-
cally, these entrepreneur-managers, as both
principals and agents, may be presented with
conflicting decisions that favour their personal
wealth at the expense of the firm’s well-being, and
vice versa. Furthermore, because an IPO repre-
sents one of the most important stages in a firm’s
lifecycle to establish effective governance controls
(Baker and Gompers, 2003; Suchard, 2009),
670
failing to reconcile these tensions may undermine
the firm’s long-term success. Thus, distinguishing
between risks to managers and those to the firm in
the decision to terminate or continue a firm’s
offering can further our understanding on agency-
based benefits and disadvantages of managerial
incentives on risk and related strategic decision
making. In the next section, we build hypotheses to
explore the link between managerial incentives,
organizational risk, and the decision to IPO a firm.
Hypotheses development
Initial public offering: timing, managerial risk and
uncertainty
An IPO represents a significant evolution in the
history of a firm (Stuart and Sorenson, 2003).
First, in turning to public equity markets to
access capital to finance operations and growth
(Brau and Fawcett, 2006), firms are securing
necessary resources to enhance long-term share-
holder wealth (e.g. via innovation, marketing,
new product launches etc.). Second, IPOs provide
managers as well as current (pre-IPO) equity
investors an opportunity to ‘cash out’ (Brau,
Francis and Kohers, 2003; Stuart and Sorenson,
2003). However, while IPOs are typically viewed
as a positive occurrence in most organizations’
lifecycles (Fischer and Pollock, 2004; Husick and
Arrington, 1998), they also entail a significant
amount of risk to managers and the firm. For
one, taking a firm public requires a large amount
of time, effort and resources on behalf of the
filing organization, with the typical IPO taking
anywhere from 9 to 18 months and costing an
average of approximately 7% to 14% of the gross
proceeds (Hare, 1994). Once the decision to
proceed with IPO is made, senior executives are
directly or indirectly consumed with the various
endeavours comprising an IPO – selecting an
underwriter, auditing financial statements, pre-
paring for the prospective investor road show,
negotiations around price setting etc. During the
IPO, the leading risk factor faced by the firm
concerns external market conditions (Benninga,
Helmantel and Sarig, 2005), in large part because
these conditions remain out of the control of firm
management, investors and other concerned
stakeholders. Accordingly, the managerial fi-
nance literature has noted that IPOs follow
timing patterns (Ritter, 1984), with managers,
S. Latham and M. R. Braun
shareholders and investments banks attempting
to target their IPO activity towards ‘good
markets’ – periods that correspond with higher
market valuations in their efforts to significantly
lower levels of IPO-related uncertainty and risk
(Benninga, Helmantel and Sarig, 2005). Alterna-
tively, in cases of poor public equity markets, the
level of risk associated with continuing with the
IPO is heightened. Post-IPO, firms are intro-
duced to additional risk as they attempt to
overcome vulnerabilities stemming from their
liabilities of newness (Chang, 2004). That is, in
their efforts to build organizational legitimacy as
a newly publicly traded firm, thereby increasing
the firm’s chance of survival, managers face the
challenge of adapting organizational structures
and processes, attaining new skills and routines,
and learning to deal with an expanded share-
holder base with often conflicting demands
(Fischer and Pollock, 2004; Gulati and Higgins,
2003; Husick and Arrington, 1998). Taken
together, the decision to become a public firm,
while a historic organizational event, is no small
feat, with dramatic implications for top manage-
ment teams – before the IPO filing, during the
process, and post-IPO.
While several parties such as investors, other
senior managers and the board of directors
become involved in a firm’s going-public process,
the decision to proceed with or withdraw from
IPO resides primarily and ultimately with the
CEO (cf. Busaba, 2006; Maug, 2001). Ownership
considerations are likely to play a role in this
important event since ‘executives who own
significant portions of their firms are likely to
control not only operating decisions but board
decisions as well’ (Finkelstein and Hambrick,
1989, p. 124). In that regard, because an IPO and
its associated uncertainties can result in differ-
ential risk–reward profiles for the CEO’s wealth
and firm value, we expect the presence or absence
of management’s personal stake in the firm to
influence the decision to forge ahead with an IPO.
As discussed previously, however, agency-based
considerations of managerial risk span a con-
tinuum. On one end of the spectrum, the Agency
Problem I view that ownership aligns managers’
and shareholders’ interests (Fama and Jensen,
1983; Jensen and Meckling, 1976) would suggest
that, as public equity markets deteriorate, man-
agerial equity participation can motivate CEOs
to proceed with IPO for the long-term health of
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To IPO or Not To IPO
the firm. That is, CEOs may be more inclined to
trade a diminished short-term, post-IPO valua-
tion of the firm for the funds necessary to create
long-term shareholder value (including their
own). In turn, if the firm forgoes going public,
managers and investors will be hindered by the
firm’s lack of financial resources, thus jeopardiz-
ing not only the firm’s long-term competitive
standing but also their own. On the other hand,
CEOs with little firm ownership have little
incentive to proceed with IPO as capital markets
deteriorate. Because managers with low levels of
corporate ownership attempt to secure the trad-
ability of their human capital on the managerial
labour market, with this tradability largely
dependent on the success or failure of the firm
(Fama, 1980), low-ownership CEOs faced with
unfavourable equity markets may well favour
‘sitting out’ the heightened market uncertainty
and post-IPO risk by withdrawing their firm’s
public offering. By considering the other end of
the spectrum of potential agency conflicts, how-
ever, Agency Problem II tenets would suggest
that, as CEO ownership reaches high levels,
managers may perceive too much of their firm-
coupled personal wealth to be at risk. As the
demand for the firm’s issue softens, thus causing
a drop in firm valuation, CEOs with large equity
investments stand to lose a significant portion of
their accumulated wealth. In their efforts to
safeguard their individual investment, these
CEOs may opt out of the IPO to reduce the
residual uncertainty of their personal outcomes,
potentially even at the expense of the long-term
performance of the firm and its other share-
holders. We therefore propose that, in IPO firms
faced with deteriorating equity markets, CEOs
with too little or too much managerial equity will
exhibit risk aversion by withdrawing from the
public offering.
H1: There is an inverse curvilinear relationship
between CEO ownership and the probability
that firms proceed with IPO as public equity
markets deteriorate.
Initial public offering: timing, organizational risk
and uncertainty
Our previous hypothesis considers one type of
risk – that pertaining to entrepreneur-managers’
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671
firm-linked wealth – influencing the IPO decision
in weakening capital markets. Strategic manage-
ment scholars make a strong case, however, that,
because risk entails a multidimensional construct,
when studying this complex topic ‘it is not risk,
but which risk, that matters’ (Wiseman and
Catanach, 1997, p. 823; italics in original). For
that reason, it is necessary for studies on risk to
specify the type of risk that fits the theory as well
as the situation under investigation (Bromiley,
Miller and Rau, 2001). As mentioned previously,
from a classical agency perspective, one organi-
zational trait that can influence managerial risk
preferences involves a firm’s debt levels; namely,
debt financing encourages agents to take riskier
investments on behalf of principals. In the
context of firms considering going public in
flagging capital markets, we anticipate leverage
intensity to drive the decision to continue or
withdraw an IPO for several reasons. For one, by
following through with the offering, managers
raise the necessary funds to repay their lenders,
thereby decreasing risks of defaulting on their
debt. Indeed, in providing for motivations of why
companies may push to go public, Busaba,
Benveniste and Guo (2001, p. 81) suggest that
‘a higher debt ratio could in some cases signal the
exhaustion of debt capacity, in which case it
would be associated with a lower likelihood of
withdrawal’. Furthermore, proceeds from an IPO
can provide managers the vital decision-making
latitude away from debt repayment towards
activities that can build long-term value in the
firm (e.g. expansion, innovation, product
launches). Lastly, from the point of view of
lenders facing a weakening capital market, it is
not unusual to expect that these important
stakeholders will urge their borrowers to go
public for the simple reason that alternative
funding markets may not be available. Especially
given liabilities of newness of the IPO firm,
lenders may opt to mitigate their downside risk
by having their borrowers reap the necessary
proceeds for debt retirement, even at the expense
of a discount to equity holders. In other words,
whereas an IPO represents an inherently risky
endeavour, lenders may favour the risk of
proceeding with the public offering for their
benefit. In general, we therefore expect that, as
public equity markets weaken, firms with higher
debt levels are more likely to follow through with
their planned offering.
672
H2: There is a positive relationship between a
firm’s leverage and its probability of proceeding
with IPO as public equity markets deteriorate.
Interaction effects of managerial risk and
organizational risk
Studies by Pagano, Panetta and Zingales (1998),
Röell (1996) and others empirically support our
previous hypothesis that a primary motivation
for firms to go public involves deleveraging their
balance sheets. Nevertheless, while it seems
intuitive that debt-laden companies need to
follow through on an IPO, Dunbar and Foerster
(2007) and Busaba, Benveniste and Guo (2001)
uncover competing results, thereby making a
compelling case that increased leverage can
discourage a firm from going public. Their
argument is based on investors perceiving high
leverage as a cautionary sign of firms with fewer
resources to put towards growth prospects after
retiring their debt obligations. The ‘lukewarm’
reception by investors and the ensuing discount
of the equity offering can impel the firm to walk
away from the IPO option. One reason for this
discrepancy in empirical findings may be due to
tensions between the managerial risks relating to
CEOs’ wealth tied to the firm and the organiza-
tional risk of leverage intensity. Proceeding with
IPO may benefit the CEO at the expense of the
firm – i.e. a CEO’s function as a principal in the
firm may take precedence over his or her
responsibility as agent. We therefore anticipate
an interaction effect between CEO ownership and
firm leverage, which helps us not only to further
tease apart managerial risk from firm risk but
also aligns with Sanders’ suggestion that ‘the
specific situational characteristics in which stock-
based incentives are present are likely play a
significant role in how those incentives affect
decision making’ (2001, p. 480). In consideration
of ambiguous findings on the role of leverage in
the IPO process we rely on competing hypotheses
on the potential interaction effects of managerial
and organizational risks on the decision to IPO
or not IPO.
From a theoretical perspective, traditional
agency views maintain a restricted notion of risk;
to be precise, agents’ self-interested motivations
make them inherently risk averse. However, the
BAM allows us to relax this static view in efforts
S. Latham and M. R. Braun
to explore those situations when managers may
exhibit more risk-seeking behaviour. When con-
sidering differential risks to managers and the
organization on the threshold of IPO, CEOs may
become more risk-seeking, depending on their
perceiving the situation as either a gain or a loss.
While precepts of the BAM involve gains and
losses as carriers of utility, it is also clear that
they are useful only when evaluated against some
reference point that helps frame the situation.
Because no formal theory exists to formulate
reference points (Fiegenbaum, Hart and Schen-
del, 1996, p. 223), depending on the questions
asked, researchers should select ‘any variable that
highlights a particular target or objective [that]
seems capable of establishing a reference point
and, subsequently, of creating a decision frame’.
Given this theoretical ambiguity about what
makes a reference point, we rely on the extent
of a firm’s leverage intensity as a referent point
for high-ownership CEOs when considering the
IPO decision. To be specific, too much debt in
pre-IPO firms may lead CEOs with high equity
stakes to perceive a situation of loss for the firm
as well as their personal wealth as capital markets
weaken. That is, failure to retire debt overhang
via IPO constrains those activities that can
enhance not only overall firm value but the
CEO’s ownership stake as well. As such, high-
ownership CEOs with much to lose may push for
IPO to protect the firm’s long-term competitive
position, in the process securing their own
wealth.
Conversely, managers lacking personal incen-
tives through ownership may become increas-
ingly risk averse since the risk of proceeding with
IPO in deteriorating capital markets may be less
imperative than their potential employment risk
(Wiseman and Catanach, 1997; Wiseman and
Gomez-Mejia, 1998). Thus, in attempts to safe-
guard their employment status (Hill and Snell,
1988) and/or their managerial reputation (Hirsh-
leifer and Thakor, 1992), they may select
initiatives with lower uncertainty in outcome. In
short, without the proper incentive, managers
facing circumstances of low ownership and high
leverage may opt for decision-making conserva-
tism that can mitigate their personal risks. We
thus resolve that, as market uncertainty intensi-
fies, the combination of ownership and leverage
positively impacts the decision to proceed with a
planned offering.
r 2010 British Academy of Management.
To IPO or Not To IPO
H3a: Leverage intensity will positively moder-
ate the relationship between CEO stock own-
ership and the decision to continue with the
IPO.
While the BAM suggests that the potential loss
of personal wealth promotes risk-seeking in
managers, this precept is confined to manage-
ment’s function as agents to the firm. However,
what CEOs as principals stand to personally gain
or lose may stand in conflict with the firm’s
overall interests. From an Agency II problem, as
discussed previously, increased equity can induce
managers to engage less risky strategies when
facing a domain of loss. As high levels of
ownership transform agents into principals,
CEOs as owner-managers begin to perceive too
great a risk to personal wealth to continue with
an IPO that may be significantly undervalued by
investors due to leverage and market conditions.
To be precise, high-ownership CEOs of highly
leveraged firms stand to lose a significant portion
of their accumulated wealth if investors discount
the offering in an anaemic IPO environment.
Furthermore, with proceeds earmarked for debt
retirement, high-ownership CEOs may be forced
to take a lesser amount of their equity claims ‘off
the table’. In their efforts to safeguard their
accumulated wealth, these CEOs may reduce the
residual uncertainty of their outcomes by for-
going an IPO with uncertain rewards, opting
instead to maximize their personal investment via
alternative exits (e.g. mergers, acquisitions, addi-
tional rounds of venture financing). Thus,
whereas the IPO can secure funds to lower firm-
related risk, the CEO’s priority to mitigate
managerial risk in the form of personal wealth
takes precedence.
In opposition, for CEOs with low equity
ownership, the BAM dictates that higher leverage
ratios may promote risk-seeking (Wiseman and
Catanach, 1997). Under these circumstances, a
priority to reduce debt levels may impel decision-
makers to take the firm public even in the light of
ambiguous capital markets. Since using the IPO
proceeds to retire debt can secure the firm’s
immediate stability and, by extension, manage-
ment’s employment security, CEOs may perceive
risks of withdrawing from IPO to outweigh risks
of proceeding with it. Our competing hypothesis
reads as follows.
r 2010 British Academy of Management.
673
H3b: Leverage intensity will negatively moder-
ate the relationship between CEO stock owner-
ship and the decision to continue with the IPO.
Methods
Event
In information technology (IT) circles, the time
period spanning early 2000 to late 2002 is
informally referred to as the ‘nuclear winter’
(Gibson, 2003; McClure, 2003). The term is
meant to conjure up the unexpected and drastic
shift in market conditions in the IT sector, which
resulted in the NASDAQ, as the benchmark of
technology sector industry valuations, losing
significant market capitalization in a relatively
short period of time (Park and Mezias, 2005).
One of the fallouts of the dramatic turn of events
was the loss of investor confidence and the
closing of the IPO window, or the option of
firms to raise equity through public equity
markets. In the aftermath of this downturn and
subsequent environmental uncertainty, managers
of technology-related firms slated to go public
under previously favourable market conditions
were forced to reconsider their plans. In many
cases, the IPO was cancelled.
Sample
The sample contains firms from the Internet-
related industries in the following IT SIC code
designations: 7371 (Computer Programming),
7372 (Prepackaged Software), 7373 (Computer
Integrated System Design), 7374 (Computer
Processing and Data Preparation and Processing
Services), 7375 (Information Retrieval Services),
7377 (Computer Rental and Leasing) and 7379
(Computer Related Services). Firms were in-
cluded that filed an S-1/A form with the
Securities and Exchange Commission after the
beginning of the NASDAQ decline, 10 March
2000. We disqualified firms from the sample that
filed a secondary offering, were spun off sub-
sidiaries (e.g. Playboy.com) or foreign filings,
such as American Depository Receipts (ADRs).
Additionally, we disqualified filings of ‘skeleton’
S-1s, which were characterized by missing data. In
applying these stringent standards in our selection
we secured a sample of firms signalling a legitimate
interest and intent in conducting an IPO. Our final
674
sample (n 5 124) included firms that either with-
drew the IPO filing (n 5 81) or continued with
their plans to hold an IPO (n 5 43) prior to the
NASDAQ’s ‘bottoming out’ on 10 October 2002.
While in the next section we detail a number of
independent and control variables, Vittinghoff and
McCulloch (2007) make the case that these sample
sizes are sufficient to maximize the effectiveness of
logistic regression.
Variables
Dependent variable. Our dependent variable,
IPO decision, was binary: whether or not the
firm opted to continue with the planned IPO
from 10 March 2000 through 10 October 2002.
Firms which proceeded with IPO were coded 1,
while firms choosing to withdraw their filing were
coded 0. We followed the approach by Busaba
(2006) by relying on the US Securities and
Exchange Commission’s EDGAR database to
identify firms withdrawing from IPO by filing an
Application for Withdrawal (Form RW).
Independent variables. Consistent with our hy-
potheses, we defined two related independent
variables. CEO ownership was measured as the
percentage of the firm owned by the CEO prior to
the IPO. While Sanders (2001) and Wright et al.
(2002) relied on the value of the shares owned by
managers, we used the percentage of shares
owned by the CEOs as these firms are pre-IPO
and fair market values could not be established.
Additionally, to test for the curvilinear relation-
ship between a CEO’s equity stake in the firm and
the decision to continue with IPO, we included a
squared term for CEO ownership (CEO owner-
ship squared). Organizational risk was measured
as the percentage of a firm’s total liabilities
divided by its total assets, mirroring Catanach’s
and Wiseman (1997) operationalization of lever-
age as organizational risk as well as finance
studies using the leverage ratio as a factor
influencing the IPO decision (Busaba, Benveniste
and Guo, 2001). Relevant data were collected
using all firms’ S-1 or S-1/A filing.
Control variables. Our first set of controls was
designed to capture alternative explanations for
continuing with or forgoing the IPO that were
S. Latham and M. R. Braun
consistent with previous governance studies using
agency theory and the BAM: size of the board of
directors, average board member tenure, board
independence, institutional ownership, senior
manager and director ownership apart from the
CEO, investor prestige, CEO duality, and the
CEO’s base compensation.
From an agency perspective, an important
governance control involves the independence of
the board as a proxy for its ability to effectively
govern critical firm decisions, including the IPO
decision. A higher percentage of outsiders gives
the board the means to effectively monitor and
control the actions of management towards
maximizing shareholder value. As such, we
controlled for the board’s independence (Board
independence) by dividing the total number of
executive officers by the total number of board
members (Arthurs et al., 2008). The size of the
board of directors (Board size) has been shown
to influence effective firm governance (Ellstrand,
Tihanyi and Johnson, 2002; Fama and Jensen,
1983) in that an oversized board represents a
potential agency cost as board members free-ride
and thus encumber the effective monitoring of
managerial behaviour (Jensen, 1993). In line with
past research efforts on board of directors (e.g.
Dalton et al., 1998; Judge and Zeithaml, 1992;
Zahra and Pearce, 1989), we operationalized
board size as the total number of directors on
the board. Additional board-level controls were
pertinent to our study in our attempts to isolate
the influence of managerial risk considerations on
the decision to IPO or not to IPO. We included
board tenure (Board tenure), as previous research
indicates that board members’ years of member-
ship in the firm can differentially impact the
decision-making status quo (Westphal and Zajac,
1995). Also, we controlled for institutional own-
ership since it has been found to significantly
impact management’s risk-taking behaviours
(Wright et al., 1996, 2007). Thus, we incorpo-
rated a variable for the equity held by institu-
tions, such as venture capitalists and other
funding organizations (Institutional ownership).
In line with this thinking, we included a variable
that captured the influence of other senior
managers and directors (Brunninge, Nordqvist
and Wiklund, 2007); in doing so, we captured a
measure reflecting the extent of officer and
director stock ownership (Director and officer
ownership). This was accomplished using the total
r 2010 British Academy of Management.
To IPO or Not To IPO
equity owned by officers and directors, less CEO
ownership. All data were gathered directly from
the principal shareholder table within the IPO
prospectus, i.e. S-1. Studies have shown that the
prestige of venture investors has significant
bearing on the performance of an IPO (e.g.
Beatty and Ritter, 1986; Carter, Dark and Singh,
1998). We therefore attempted to control for the
effect of investor prestige (Investor prestige) by
determining the number of top 20 venture
capitalists and/or top 50 corporate venture funds
(e.g. Intel) that were invested in the organization
at the time of the S-1 filing.
From an agency perspective, an important
governance control involves the separation of the
roles of CEO and chair of the board (Boyd,
1995). This non-duality gives the board of
directors, as the primary vehicle to represent the
rights of the shareholders, the means to effec-
tively monitor and control the presumably share-
holder-value-destroying actions of management.
In cases when market conditions may discourage
CEOs from placing their personal wealth at risk
by proceeding with IPO, non-duality can provide
the board the necessary influence and authority
to advocate for the public offering. As such, we
controlled for CEO duality using a binary
dummy variable; the dummy variable was coded
as 0 if the CEO did not serve as board chair (non-
duality), and 1 otherwise (duality).
Finally, we controlled for possible variance
associated with executive compensation insulated
from firm performance (CEO base). Sanders
(2001), Wiseman and Gomez-Mejia (1998) and
others have demonstrated a relationship between
varying levels of base pay and risk-taking among
strategic options. Because high levels of base
salaries may influence CEOs to become more risk
averse by cancelling IPO as public equity markets
deteriorate, we included CEO base as the total
annual salary divided by total assets at the time
of public filing.
Our second set of control variables attends to
firm-specific factors that were likely to influence
the decision to continue with the IPO. As larger
firms are more likely to proceed with IPO
(Busaba, Benveniste and Guo, 2001), we included
a firm-level control for the size of the firm (Firm
size) using the log of total assets (Arthurs et al.,
2008). It was also necessary to account for any
variance associated with firm performance. Thus,
we controlled for a firm’s profitability measuring
r 2010 British Academy of Management.
675
its return on assets (Performance). Lastly, it was
important to capture the degree of intellectual
property associated with patents awarded and
patents pending. The degree of a firm’s techno-
logical capabilities has been found to have a
profound effect on IPO success as proceeds from
going public can be used to monetize innovations
(Deeds, Decarolis and Coombs, 1997). We
operationalized our control to capture not only
the patent stock (i.e. awarded) but patent flows
(i.e. pending) as well. Relevant data were
gathered throughout all firms’ S-1s or S-1As
(Patent stock and flow).
Analysis. Because our study involved a binary
outcome (i.e. to IPO or not to IPO), we relied on
a logistic regression model (Hoetker, 2007). Our
study was similar to other studies in scale and
scope which have relied on similar methods
(Bergh, 2001; Chatterjee, Harrison and Bergh,
2003). In the next section, we detail the extent to
which managerial risk and organizational risk,
separately and in combination, related to the
decision to continue with or cancel a planned
IPO.
Results
Table 1 offers the means, standard deviations and
correlations between the various variables. While
we found several significant correlations, none
proved indicative of collinearity after reviewing
both the condition index and the variance
inflation factors. Neither approached the level
required for concern (Besley, Welsch and Kuh,
1980). Table 2 illustrates the stepwise employ-
ment of our model.
We followed an iterative estimation procedure,
with Model I offering a baseline model, Model II
establishing the factor variables and Model III
introducing the interaction terms. Table 2 sum-
marizes the coefficients estimates, goodness of fit
and classification estimates. In interpreting our
results, we followed recent literature on the use of
logistic regression within the strategy discipline
(Hoetker, 2007). Logistic diagnostics supported
the model’s integrity. In each step, the model
demonstrated a high level of validity and
reliability. As Table 1 illustrates, each model is
statistically significant. In the first model, the
676 S. Latham and M. R. Braun

1.00
intercept-only step resulted in a 2 log like-

13
lihood of 156, subsequently reduced to 132. The

1.00
0.14
12 control-only model reduced the 2 log like-
lihood from 156 to 97, with the full model
reducing the 2 log likelihood from 156 to 91.

1.00
0.07
0.14
11

As Table 2 illustrates, in each instance, the

Hosmer–Lemeshow test was not significant as

0.53**
well, indicating adequate fit.

1.00
0.10
0.06
10

Classification statistics are also reported in

Table 2. Again, each model offers acceptable
metrics. In Model I, the control-only model,

0.68**
0.19*
1.00

0.01
0.11
overall classification was 72%, while sensitivity
9

and specificity were 85% and 63%. In Model II,

the control and main effect model, overall
1.00
0.03
0.08
0.06
0.07
0.12
classification improved to 80%, while sensitivity
8

and specificity were similarly improved to 89%

1.00
0.17
0.11
0.03
0.17
0.00
0.16

and 76%, respectively. The full model’s overall

7

classification accounted for 80%, with the mod-

el’s sensitivity unchanged at 89% but with a
0.53**

0.21*

marginally improved specificity of 77%. As

1.00
0.06
0.06

0.07
0.13
0.04
6

detailed, the overall classification was highly

robust. However, misclassification occurred on
0.18*
1.00
0.13
0.07
0.09
0.07
0.08

0.00
0.04

outlier cases with regard to CEO ownership in

5

the upper tail of our distribution. The log

likelihood for each additional model was statis-
0.25**

tically different from its predecessor (po0.001).

1.00
0.07
0.17

0.03
0.02
0.00
0.08
0.17
0.05
4

Additionally, the Nagelkerke R2 exhibited a

statistically significant increase with each subse-
0.23**

0.25**

quent iteration.
1.00
0.05
0.09
0.11

0.14
0.12

0.12
0.03
0.10
3

We focus on Model III, the fully specified

model, in testing our hypotheses. The results offer
0.29**

0.23**

strong support for Hypothesis 1 (po0.001),

0.17*
1.00
0.04
0.09
0.06
0.15
0.02
0.11

0.09
0.11

stating that CEO stock ownership demonstrates

2
Table 1. Mean, standard deviations and correlations among variables

a negative curvilinear relationship with the

decision to go public. Thus, our findings support
0.36**

0.32**
0.23*
1.00
0.01

0.11
0.05
0.01

0.07
0.12
0.12
0.11
0.17

managerial behaviour along the continuum of

1

agency-based considerations of risk-taking.

Firms headed by CEOs with low levels of
Mean Std dev.

0.16
0.91
0.23
0.49
2.34

0.14
0.20
0.53
9.85
0.98
1.59
4.30
27517 71651

ownership, exhibiting risk aversion related to

Agency Problem I, opted to postpone the IPO.
Similarly, symptoms relating to Agency Problem
0.13
0.57
0.44
0.59
6.63

0.32
0.55
1.27
3.96
0.77
0.80
3.94

II are visible in that high levels of ownership

induced CEOs to withdraw from IPO in efforts to
Director/officer ownership

protect their firm-coupled wealth.

Institutional ownership

Hypothesis 2 was also supported. Organiza-

Patent stock and flow
Board independence

Organizational risk

tions with a higher level of debt tended to

Variable

Investor prestige
CEO ownership

continue with the IPO (po0.01). Such a finding

Board tenure
CEO duality
Performance

is consistent with past literature on the relation-

CEO salary
Board size

Firm size

ship between organizational decision making and

IPOs: more highly leveraged firms tended to
proceed with IPO in an effort to fund their cash
10
11
12
13

flow linked to non-operating aspects of the

#

1
2
3
4
5
6
7
8
9

r 2010 British Academy of Management.

To IPO or Not To IPO 677

Table 2. Results of logistic regression on the IPO withdrawal decisiona

Model I Model II Model III

Constant 61 (1.46) 4.58 (1.95)** 4.79 (1.98)**

Firm size 0.56 (0.73) 0.13 (0.81) 0.33 (0.83)
Patent stock and flows 0.01 (0.03) 0.01 (0.03) 0.01(0.03)
Board size 0.27 (0.10)*** 0.53 (0.15)*** 0.57 (0.15)***
Board tenure 0.02 (0.08) 0.16 (0.09)w 0.14(0.09)w
Board independence 2.59 (1.87) 1.37 (2.08) 1.22 (2.12)
CEO dualityb 0.76 (0.48) 0.85 (0.59) 1.07 (0.63)w
Institutional ownership 3.17 (1.17)*** 2.94 (1.57)w 2.93(1.58)w
CEO salary 0.00 (0.00) 0.00 (0.00) 0.00 (0.00)
Director and officer ownership 1.18 (1.15) 4.78 (1.65)*** 4.80 (1.68)***
Organizational performance 0.21 (0.29) 0.03 (0.36) 0.10 (0.37)
Investor prestige 0.29 (0.22) 0.70 (0.28)** 0.97 (0.33)***
CEO ownership 26.51 (6.34)*** 23.05 (6.59)***
CEO ownership squared 25.93 (6.61)*** 27.87 (7.13)***
Organizational risk 0.42 (0.16)*** 0.37 (0.17)**
CEO ownership squared  organizational risk 21.00 (13.02)w
Chi-square model statistic (26.46, df 5 11)** (59.54, df 5 14)*** (62.95, df 5 15)***
Hosmer–Lemeshow test significance 0.42 (X2 5 8.10, df 5 8) 0.89 (X2 5 3.61, 8) 0.80 (X2 5 4.58, 8)
Nagelkerke R2 0.27 0.53 0.56
Overall classification 72% 80% 80%
Sensitivity 85% 89% 89%
Specificity 63% 76% 77%
a
N 5 124; for each variable, the estimated coefficient is given with the standard error in parentheses.
b
Categorical value for duality coded 1; thus significance is contrasted against a non-dual structure.
w
po0.10; *po0.05; **po0.01; ***po0.001.

business, i.e. interest and debt expense. That is, in
view of weakening public markets, higher debt
firms proceeded to lock in necessary proceeds to
deleverage their balance sheets.
Despite our support for both Hypothesis 1 and
Hypothesis 2, these findings need to be tempered
in light of the interaction between CEO owner-
ship and leverage. Our results in Model III
provide support for Hypothesis 3a – the interac-
tion term between CEO stock ownership and
leverage demonstrates a positive relationship in
the decision to go public (po0.10). Our results
suggest two interesting findings. For one, man-
agers with low equity positions at firms with low
leverage appear to withdraw the IPO at a higher
rate than their peers. Similarly, managers with
high equity positions at highly leveraged firms
tend to withdraw IPOs at a higher rate than their
peers. As the interpretation of logistic regression
is more difficult than that of standard ordinary
least squares regression, we graphed the results in
an effort to offer a more insightful examination of
our findings. This is consistent with Hoetker’s
(2007, p. 337) call for best practices in logistic
regression wherein he maintains that ‘if the model
includes square terms or interactions among
more than two variables a graphical representa-
tion is almost required’. We therefore included
two figures. Figure 1 illustrates the main effect of
the CEO ownership squared on the IPO decision,
indicating that while too little equity fails to
induce managerial risk-taking, too much equity
can also lead to risk-averse behaviour in man-
agers. The quadratic trend captures approxi-
mately 11% of the variance in the model.
Figure 2 depicts the interaction between CEO
ownership squared and Leverage on the IPO
decision. We did not centre the interaction since
the main effect variables encompassed by the
interaction did not have a significant correlation,
thus posing little concern of multicollinearity
(Jaccard and Turrisi, 2003). It is important to
note in Figure 2 that the inverse U-shape
remains, indicating that firm leverage influences
the risk–return profile of CEOs with high own-
ership in their firm. Specifically, CEOs with high
levels of equity, when faced with high leverage in
weak capital markets, opted to withdraw from
IPO. In other words, it appears that as organiza-
tional risk in the form of leverage increases, high-

r 2010 British Academy of Management.

678
ownership CEOs were less likely to risk their
firm-coupled wealth at a discount arising from a
weakened public equity market. At the other end
of the spectrum, when firms are characterized by
low leverage, CEOs with little ‘skin in the game’
also display risk-averse behaviour by becoming
more inclined to withdraw from IPO.
The model offered several other interesting
findings with regard to control variables. Several
board governance controls were significant. In
addition to reporting the significance, we also
relied on the odds ratios (exp(b)). In the absence of
interactions or curvilinear effects, odds ratios can
Figure 1. Effect of ownership on the decision to continue or
withdraw IPO
Figure 2. Effect of ownership and leverage on the decision to continue or withdraw IPO
S. Latham and M. R. Braun
be helpful in understanding the effects. While the
odds ratio is preferred for interpretation of
individual variables, it is not recommended for
comparing the relative strength or weakness of the
variables. Board size (po0.001; exp(b) 5 1.77),
board tenure (po0.10; exp(b) 5 1.15) and director
and officer ownership (po0.001; exp(b) 5 0.01)
were significant, indicating that organizations with
larger, more tenured boards were more likely to
continue with the IPO than their comparable
peers. By interpreting the odds ratio for both
variables, we can offer a fuller interpretation. For
example, a board composed of six members versus
a four-member board was approximately twice as
likely to go public. Similarly, a board with an
average tenure of 5 years compared to a board
with a median tenure of 3.94 demonstrated
predicted odds of approximately 32% greater
chances of continuing with IPO. While out of
the scope of this study, our results reveal that
perhaps board members with a higher degree of
tenure viewed the IPO as a means of reaping
service rewards while taking little risk. Specific
officer and director ownership, while significant,
exhibited little bearing on the odds. We also
found several investor variables to be significant.
Investor prestige (po0.001; exp(b) 5 2.63) had a
strong bearing on IPO go or no-go decision.
Accordingly, perhaps firms with a higher degree of
legitimacy arising from investor prestige viewed
r 2010 British Academy of Management.
To IPO or Not To IPO
risks of proceeding into weakening public equity
markets to be partially mitigated. For these firms,
under the model, a firm with one more highly
respected venture capital or corporate venture
partner was twice as likely to continue with the
IPO. Institutional ownership, while significant
(po0.10; exp(b) 5 0.05), had less bearing on the
decision. We now shift to a more thorough
discussion of our findings.
Discussion
With this study, we sought to demonstrate that
our understanding of the effectiveness of govern-
ance controls in certain organizational forms can
be enhanced by using all three agency perspec-
tives in unison. Empirical studies using agency
theory have become increasingly fragmented as
scholars fit their research questions to one type of
agency lens, at the exclusion of others. However,
firms can display facets of agency conflicts
relating to Agency Problem I, Agency Problem
II and the behavioural agency perspective, as is
the case in venture firms making the transition to
public ownership. Our results lend support to the
notion that using agency-based considerations in
tandem to clearly demarcate managerial risk
from firm risk can offer a richer interpretation
of strategic decision making. Moreover, our
study contributes to previous research (cf. Hill
and Snell, 1989; Latham and Braun, 2009;
Palmer and Wiseman, 1999; Tan and Peng,
2003) on the extent to which management’s
strategic decisions may be influenced by what
they stand to personally gain or lose from a
particular investment decision. We posited that
these personal risk profiles – and their subsequent
effect on the decision to continue with an IPO –
can be better understood when considering the
full range of managerial, firm and environmental
risk factors. Our findings confirm that CEOs’
ownership levels in the firm alter their personal
risk profiles and, subsequently, their decision-
making behaviour. However, our inclusion of the
full continuum of agency-based considerations of
ownership on managerial risk-taking demon-
strates that equity ownership, as a shareholder
alignment incentive, displays variable effects
depending on management’s perception of risk
and risks to the organization. In the particular
case of firms on the precipice of IPO in
r 2010 British Academy of Management.
679
deteriorating public equity markets, we find a
complex relationship between managerial equity
and strategic decision making. First, our results
illustrate that both low and high levels of
managerial ownership, in placing too high a
personal risk burden on the shoulders of CEOs,
introduce risk-averse behaviour on strategic
decision making. That is, at either extreme of
equity participation, managerial risk-taking be-
comes uncoupled from firm risk, leading CEOs to
protect their own interests at the expense of other
shareholders by forgoing the IPO. These findings
suggest that the Agency Problem I prescription of
increased equity participation by management
works – but up to a point, since, in due course, it
can give rise to Agency Problem II. While this
result supports previous findings by Cho (1998)
and others, we find that, as put forth by the BAM
(Wiseman and Gomez-Mejia, 1998), problem
framing by decision-makers matters a great deal.
In testing for variables that can influence the
risk–return profile of organizational decision-
makers, we find that the combination of high
ownership and high levels of firm debt can deter
CEOs from engaging in riskier firm activities – in
this case, it seems that CEOs with significant
equity participation may perceive the dual threats
of leverage intensity and weak capital markets as
too great on their firm-coupled wealth. In
recognizing the potentially deep discount to their
post-IPO equity valuation, our findings suggest
that these CEOs choose to pass on their planned
IPO, possibly with the hope of revisiting a
liquidity event in the future. As such, high-
ownership CEOs, as both principals and agents,
may give priority to mitigating their personal
risks in favour of those of the organization. At
the other end of the spectrum, weakening equity
markets provide weak incentives for CEOs with
little ownership and low levels of debt to proceed
with a firm’s public offering.
Our findings also shed light on situations
wherein decision-makers occupy dual roles as
both principals and agents. Conceptually speak-
ing, clear delineations exist concerning the board
of directors’ role as ‘guardians of stockholder
welfare’ (Hill and Snell, 1988, p. 579) – board
members, representing principals in the firm,
retain the authority to approve and monitor
decisions concerning the allocation of firm
resources while the agent’s responsibility is
confined to initiating and implementing those
680
decisions. While in theory this division of duties
permits the separation of ownership from control
to be played out efficiently in public corporations,
our exploration reveals the messy process by
which firms arrive at their public status. Espe-
cially in cases of companies where management
occupies a multitude of roles (e.g. manager,
owner, board member), we demonstrate the
importance of distinguishing between decision
management and decision control in companies
changing their ownership constitutions. In a
similar vein, our study suggests that previous
scholarly efforts focused exclusively on market
and financial determinants of the IPO process are
limited in scope and predictive capacity – our
findings add a missing piece to the puzzle
concerning equivocal findings on the determi-
nants of firms going public. That is, conflicting
empirical evidence on the function of debt in the
IPO process, it appears, can be partially recon-
ciled by including variables that purposely
account for management’s stake in the matter.
Given the importance of structuring the right mix
of governance controls in IPO-going firms, we
conclude that stakeholders are better served
putting in place effective managerial incentives
that balance the interests of principals and agents
alike.
Our study was limited in several regards. Our
analysis was specific to a single sample and event,
although we do not believe this significantly
undermines the findings. Instead, given the
preponderance of managerial equity as an in-
centive, and IPO activity during the technology
‘boom’ years, we believe that this context offered
an ideal setting in which to test our hypotheses.
Also, our study did not endeavour to determine
the fate of firms continuing with, or withdrawing
from, IPO, although future research may benefit
from a more rigorous treatment of the outcome
of the IPO decision, as well as operationalization
of other strategic decisions that might affect a
firm’s fate.
In spite of the limitations of our study and the
good potential for additional research on the
influence of managerial risk considerations in
strategic decision making, our results contribute
to both scholarship and practice. To the extent
that the governance in corporations is about
tensions between various stakeholders, our find-
ings have implications for a variety of organiza-
tional forms (e.g. family-controlled public firms,
S. Latham and M. R. Braun
leveraged buyouts, firms with activist-investor
involvement etc.) that may potentially suffer from
a range of agency conflicts. In such firms,
conflicts are likely to arise between the control-
ling and non-controlling shareholders, as well as
individuals occupying both principal and agent
functions. Our results indicate that the examina-
tion of these ‘hybrid’ organizational forms and
management structures using one agency lens at
the expense of others can lead researchers to
overlook additional important facets that can
inform on effective strategic management. Future
research can benefit from employing the con-
tinuum of agency considerations in other com-
panies exhibiting ownership conflicts, across a
variety of external conditions. Our results
strongly suggest that, depending on circum-
stance, trade-offs between managerial and orga-
nizational risks exist. From a practical point of
view, our finding indicates that the use of
ownership as an alignment incentive requires
careful treatment. By taking into account a
multitude of factors that can alter management’s
risk–return profile in regard to their firm-coupled
wealth, governing bodies (compensation commit-
tees, boards of directors etc.) can gain clearer
insight into the effective design of mechanisms to
increase shareholder value.
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Scott F. Latham is an assistant professor of management at the University of Massachusetts Lowell.

His research and consulting interests focus on the process of creative destruction – the interplay of
innovation, entrepreneurship and the business cycle that transforms industries. His main research
stream focuses on the .com crash, specifically the strategies that successful companies employed to
survive.

Michael Braun is an assistant professor of management at the University of Montana. His research
interests involve the exploration of diverse organizational forms and their related structures and
strategies during periods of uncertainty and decline.

r 2010 British Academy of Management.