Shareholder Diversification and the Decision to Go Public

Posted: 15 Dec 2008

See all articles by Andriy Bodnaruk

Andriy Bodnaruk

University of Illinois at Chicago

Eugene Kandel

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: November 2008

Abstract

We study the effects of the controlling shareholders' portfolio diversification on the initial public offering (IPO) process. Less diversified shareholders have more to gain from taking their firm public, and are more willing to accept a lower price for shares. We test these hypotheses using the data on all IPOs in Sweden between 1995 and 2001. Using detailed information on the portfolio composition of shareholders in private and public firms, we construct several proxies of their portfolio diversification and relate them to the probability of the IPO and the underpricing. We show that the less diversified individual shareholders, especially those with lower wealth, sell more of their shares at the IPO. Firms held by less diversified controlling shareholders are more likely to go public, and exhibit higher underpricing. These effects are economically and statistically significant, while the diversification of noncontrolling shareholders has no effect. Our findings suggest that diversification of controlling shareholders plays a prominent role in the IPO process.

Keywords: G120, G140, G240, G320

Suggested Citation

Bodnaruk, Andriy and Kandel, Eugene and Massa, Massimo and Simonov, Andrei, Shareholder Diversification and the Decision to Go Public (November 2008). The Review of Financial Studies, Vol. 21, Issue 6, pp. 2779-2824, 2008. Available at SSRN: https://ssrn.com/abstract=1315607 or http://dx.doi.org/hhm036

Andriy Bodnaruk (Contact Author)

University of Illinois at Chicago ( email )

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Eugene Kandel

Hebrew University of Jerusalem - Department of Economics ( email )

School of Business
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Jerusalem 91905
Israel
+972 2 588 3137 (Phone)
+972 2 581 6071 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Massimo Massa

INSEAD - Finance ( email )

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France
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+33 1 6072 4045 (Fax)

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

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East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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