Certification or Expropriation? Business Groups in IPO Markets

Abstract:     
Using a sample of IPOs from 39 countries, this study investigates the effect of group affiliation on the IPO process. At the country level, we find that external capital availability is negatively related to the difference in average IPO issuing costs between group and non-group firms. At the firm level, we document that group-affiliated firms are able to go public more frequently in weak IPO markets and incur lower IPO costs than independent firms. While IPOs under a pyramidal structure are associated with lower underpricing, those with dual-class shares have higher underpricing. Group IPOs on average possess lower post-listing valuation than their non-group peers. However, after controlling for endogeneity by using differences in IPO market conditions between when group and non-group go public as instrumental variables, our evidence indicates that certain firm types realize higher valuations with group support relative to the counterfactual situation where they sell equity as independent firms. These findings simply that business groups provide a financing advantage for group-affiliated firms and act as substitutes for various capital market mechanisms that are often underdeveloped in emerging economies.

Number of Pages in PDF File: 44

Keywords: business groups, ownership structure, IPO

working papers series