The controlling shareholder of a firm may suffer as a result of its right to control the firm due to unfavorable market reactions associated with concerns on private benefit extraction by the controlling shareholder. Thus, the controlling shareholder has an incentive to build a good governance mechanism as a commitment device in order to discipline itself, which allows it to sell shares at a higher price in the initial public offering (IPO). An improvement in pricing efficiency will give the controlling shareholder more incentive to limit its private benefits from controlling the firm. Therefore, we propose that, besides improving the efficiency of capital allocation, the development of the financial market can shape the corporate governance of firms in an economy, thus improving firm operation efficiency. A model of IPO is constructed to demonstrate this mechanism of market discipline. Using data from China stock market on the regulatory changes in IPO pricing and firm ownership structure, we find evidence consistent with the model’s implications.