Control as a Motivation for Underpricing: A Comparison of Dual- and Single-Class Ipos

Abstract

We find that dual-class firms experience less underpricing, higher post-IPO institutional ownership, and less frequent control events than single-class firms. Each finding is consistent with the "reduced monitoring hypothesis" of Brennan and Franks (1997), which explains underpricing as a mechanism by which insiders create dispersion in the post-IPO ownership structure. By separating cash flow and voting rights, dual-class managers can raise capital without sacrificing control. Having ensured voting control, dual-class issuers have no incentive to underprice to limit large shareholders' post-IPO monitoring. Although dual-class firms achieve a lower underpricing cost relative to single-class firms, they trade at lower pricing multiples.

Keywords: Initial Public Offerings (IPO), Underpricing, Dual Class, Reduced Monitoring, Governance

JEL Classification: G24, G32, G34