Ownership Structure And IPO Underpricing

The underpricing of Initial Public Offerings (IPO) of common stock has been confirmed by researchers in many different countries. A number of theories have been put forward to explain IPO underpricing. Stoughton and Zechner(1998) and DeMarzo and Urosevic(2006) argue that investors are not homogeneous in their ability to monitor management of the newly public firm. Large investors have an advantage in this regard. Therefore, IPO underpricing guarantees the participation of large investors who can monitor and hence value enhancing. However, under the theory of Booth and Chua (1996) and Brennan and Franks (1997), a diffuse share ownership structure post issue is preferred, since it increases the liquidity benefits and limits the influence of block shareholders, thus protecting directors from the threat of hostile takeover.The theories of Stoughton and Zechner and Brennan and Franks support opposing relationships between underpricing and the extent to which block shareholdings arise at the IPO. The focus of this paper is an examination of the relationship between underpricing and shareholding concentration immediately post issue in China’s A-share Stock market. This paper employs data relating to shareholdings of firms listing on the Shanghai and Shenzhen Stock Exchanges, and provides compelling evidence that IPO underpricing does not arise from the shareholding concentration of the post IPO firm. It is suggested that research is directed elsewhere to find an answer to the underpricing phenomenon.The structure of the paper is as follows. The problem of IPO underpricing is introduced in Section1. Section2discusses the related literature. Section3contains an analysis of the theories relating underpricing at the IPO to post issue ownership structure, which leads to a number of hypotheses for testing. Section4contains a description of the data and methodology employed in the empirical analysis and the results are presented. Section5provides a concluding discussion.