Underpricing and CEO Stock Options: Do Board Characteristics Matter?

This paper examines the conditions under which CEOs are able to affect the timing and the price of the stock options they are granted at the time of their firm’s IPO. Contrary to Lowry and Murphy (2007) who do not find a relationship between IPO grants and IPO underpricing, this paper finds such a relationship when board independence, the power of the CEO and venture capital (VC) backing are taken into account. The results suggest that powerful CEOs and VCs are able to reap substantial gains from IPO options to the detriment of the shareholders.