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Underpricing, Ownership and Control in Initial Public Offerings of Equity Securities in the UK

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  • Brennan, Michael J
  • Franks, Julian R

Abstract

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.

Suggested Citation

  • Brennan, Michael J & Franks, Julian R, 1995. "Underpricing, Ownership and Control in Initial Public Offerings of Equity Securities in the UK," CEPR Discussion Papers 1211, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1211
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    References listed on IDEAS

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    1. 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.
    2. Luigi Zingales, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 425-448.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    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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    More about this item

    Keywords

    IPOs; Private Benefits; Rationing; Underpricing;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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