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

41 Pages Posted: 25 Jul 2000

See all articles by Scott Smart

Scott Smart

Indiana University - Kelley School of Business - Department of Finance

Chad J. Zutter

University of Pittsburgh - Finance Group

Date Written: August 2000

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

Suggested Citation

Smart, Scott B. and Zutter, Chad J., Control as a Motivation for Underpricing: A Comparison of Dual- and Single-Class Ipos (August 2000). Presented at Tuck-JFE Contemporary Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=236107 or http://dx.doi.org/10.2139/ssrn.236107

Scott B. Smart (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Kelley School of Business
Bloomington, IN 47405
United States
812-855-3401 (Phone)
812-855-5875 (Fax)

Chad J. Zutter

University of Pittsburgh - Finance Group ( email )

352 Mervis Hall, Katz GSOB
University of Pittsburgh
Pittsburgh, PA 15260
United States
412-648-2159 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~czutter/

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