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Underpricing, ownership and control in initial public offerings of equity securities in the UK

  • Brennan, M. J.
  • Franks, J.

In this paper we examine how separation of ownership and control evolves as a result of an initial public offering (IPO) and how the underpricing of the issue can be used by insiders to retain control. Using data from a sample of 69 IPOs in the United Kingdom, we argue that IPO underpricing is used to ensure over-subscription and rationing in the share allocation process so as to allow owners to discriminate between applicants for shares and reduce the block size of new shareholdings. We find that of the pre-IPO shareholders in a firm, directors sell only a small fraction of their shares at the time of the offering and in the seven subsequent years; in contrast, holdings of non-directors are virtually eliminated during the same period. As a result, in less than seven years almost two-thirds of the offering company's shares have been sold to outside shareholders, thereby substantially advancing the process of separation of ownership and control. Additional evidence in the paper suggests that rationing in the IPO discriminates against applicants who apply for large blocks, and that the greater the underpricing, the smaller the size of new blocks assembled after the IPO.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 45 (1997)
Issue (Month): 3 (September)
Pages: 391-413

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Handle: RePEc:eee:jfinec:v:45:y:1997:i:3:p:391-413
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  1. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, vol. 27(2), pages 447-471, October.
  2. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
  3. Chowdhry, Bhagwan & Sherman, Ann, 1996. "International differences in oversubscription and underpricing of IPOs," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 359-381, July.
  4. Levis, Mario, 1990. "The Winner's Curse Problem, Interest Costs and the Underpricing of Initial Public Offerings," Economic Journal, Royal Economic Society, vol. 100(399), pages 76-89, March.
  5. Booth, James R. & Chua, Lena, 1996. "Ownership dispersion, costly information, and IPO underpricing," Journal of Financial Economics, Elsevier, vol. 41(2), pages 291-310, June.
  6. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
  7. Franks, Julian & Mayer, Colin, 1996. "Hostile takeovers and the correction of managerial failure," Journal of Financial Economics, Elsevier, vol. 40(1), pages 163-181, January.
  8. Barclay, Michael J. & Holderness, Clifford G. & Pontiff, Jeffrey, 1993. "Private benefits from block ownership and discounts on closed-end funds," Journal of Financial Economics, Elsevier, vol. 33(3), pages 263-291, June.
  9. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
  10. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
  11. Zingales, Luigi, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Wiley Blackwell, vol. 62(3), pages 425-48, July.
  12. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
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