Abstract

Initial public offering (IPO) underpricing is a common financial phenomenon in capital markets. Previous literature shows that family-controlled firms are less underpriced than other firms when they go public for capital. Throughout China's 40 years of reform and opening up, private firms have played an important role in the market, and most of them are family-owned and family-managed businesses. Today, many Chinese first-generation entrepreneurs have reached retirement age, and second-generation family members have taken over their firms. In this paper, we explore two aspects of corporate governance: family participation and second-generation involvement. We use family ownership and percentage of family directors to measure family participation. Our empirical research indicates that the degree of family participation is significantly negatively correlated with the IPO underpricing of family firms. Moreover, our findings suggest that, when the second generation serves as chairmen or CEOs in their family businesses, the IPO underpricing is lower than with other family firms.