Incentives and Governance in Entrepreneurial Firms*

This paper analyzes corporate governance decisions at firms making initial public offerings (IPOs) of common stock between 1996 and 1999. Our objective is to examine relationships between firms’ corporate governance practices and the quality and availability of accountingand market-based measures of firm performance. We collect a sample of 464 companies from the manufacturing, internet, and technology (non-internet) industries, and examine how CEO incentives vary with industry and with the extent of venture capital influence. We first study determinants of executives’ compensation-related incentives and share ownership at the time of the IPO, and then examine factors affecting firms’ decisions over executive compensation grants and CEO turnover subsequent to the IPO. Consistent with prior research that finds earnings are of limited usefulness in firm valuation for internet firms, we find internet and non-internet firms place differing importance on earnings and information in stock returns in determining post-IPO compensation grants. We also find that firms with little or no venture capital influence display significantly stronger association with accounting and stock performance measures than firms with more intense monitoring by venture capitalists.