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A Managerial Motive for Initial Public Offering Underpricing

Boulton, Thomas J. (2007) A Managerial Motive for Initial Public Offering Underpricing. Doctoral Dissertation, University of Pittsburgh. (Unpublished)

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There are many reasons why managers are interested in maintaining control over their firm. Some potential reasons include compensation, autonomy, power, perquisites, and the ability to determine the terms under which the firm is acquired. This study examines one event that provides an opportunity for managers to take actions designed to maintain control of firm, the initial public offering (IPO). A simple rationing approach provides the mechanism which impacts management's ability to maintain control. The hypothesis underlying this study is that managers strategically underprice the IPO to influence outside blockholdings. By preventing large outside blocks from forming as part of the IPO, management reduces the incentive for outsiders to monitor their actions, resulting in greater autonomy.Chapter One documents that IPO underpricing is significantly related to country-level governance characteristics. Examining a sample of 4.698 IPOs across 24 countries for the 2000-2004 time period, the results suggest that IPO underpricing is higher in countries which offer greater protection to investors. These findings are consistent with the hypothesis that IPO underpricing is an instrument used by managers to maintain control of the firm when country-level governance mechanisms favor investors' rightsChapter Two finds that IPO underpricing exhibits a significant, positive relation with activity in the market for corporate control. Examining a sample of over 2,300 initial public offerings in the United States over the 1990-1998 time period, the results suggest that underpricing is greater when the market for corporate control is active. Additional results indicate that the corporate control climate prevailing at the time of the offering is related to the likelihood that a firm survives in subsequent years, that underpricing is associated with the post-offering ownership structure, and that the size of the external blockholdings formed concurrent with the offering are positively related to the probability a firm is taken over in the years following the event. Together, the findings presented in this study are consistent with the hypothesis that underpricing is an instrument used to protect managers when other governance mechanisms, including investors' rights and the market for corporate control, threaten their control over the firm.


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Item Type: University of Pittsburgh ETD
Status: Unpublished
CreatorsEmailPitt UsernameORCID
Boulton, Thomas
ETD Committee:
TitleMemberEmail AddressPitt UsernameORCID
Committee ChairLehn, Kennethlehn@katz.pitt.eduDEFENSE
Committee MemberZutter, Chadczutter@pitt.eduCZUTTER
Committee MemberJennings,
Committee MemberSmart,
Committee MemberThomas, Shawnshthomas@katz.pitt.eduSHTHOMAS
Date: 12 January 2007
Date Type: Completion
Defense Date: 14 August 2006
Approval Date: 12 January 2007
Submission Date: 16 August 2006
Access Restriction: No restriction; Release the ETD for access worldwide immediately.
Institution: University of Pittsburgh
Schools and Programs: Joseph M. Katz Graduate School of Business > Business Administration
Degree: PhD - Doctor of Philosophy
Thesis Type: Doctoral Dissertation
Refereed: Yes
Uncontrolled Keywords: control; corporate finance; governance; Initial public offering; IPO; mergers and acquisitions; international finance; underpricing
Other ID:, etd-08162006-161202
Date Deposited: 10 Nov 2011 19:59
Last Modified: 15 Nov 2016 13:49


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