Principal Costs in Initial Public Offerings

The initial public offering (IPO) of a new venture's stock often results in significant changes to the firm's ownership structure. Because firm owners (principals) often have heterogeneous interests, conflicts can arise among the principals. While governance mechanisms are often effective in limiting agency problems, we suggest that principals can also attempt to use governance mechanisms to their own advantage in IPO settings. Specifically, when principal–principal conflict exists, powerful principals may exert control via governance mechanisms to pursue their own interests in ways that create inefficiencies in the form of ‘principal costs’.