Date of Award

1994

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Finance (Business Administration)

First Advisor

Gary C. Sanger

Abstract

This dissertation examines the importance of equity structure choice by management in the context of IPOs. Specifically, it identifies and presents some managerial motives for a dual-class equity structure at the time of IPO that derive from governance and market microstructure considerations, and analyzes the effects of dual-class common stock structures (versus single voting class common stock) and the distribution of voting power on initial underpricing, subsequent after-market pricing, long-run firm performance, insider trading, firm liquidity and related market microstructure issues. To assess underpricing and performance differences that are due to the firm's ownership structure, a control sample of single-class IPOs that is matched to the dual-class by exchange, firm size, industry, and time of offering is created. For the sample of all dual-class IPOs in the 1980s, the study finds no statistically significant abnormal long-run performance over a three year horizon. This stands in sharp contrast to Ritter's (1991) finding of significant IPO underperformance in the three years after going public. Upon comparing dual-class and control group performance across different exchanges, the study finds that for both NYSE/AMEX and NASDAQ, single-class IPOs significantly underperform dual-class IPOs in stock-price performance during the three years following the offering. The underperformance is not sensitive to the choice of benchmark used to adjust for market movements, or to the exchange on which the shares trade. Additionally, using various accounting measures of operating performance, the study finds that over three years of trading on the market dual-class IPOs on average are twice as profitable as single-class IPOs. Furthermore, a dual-class structure is found to reduce the adverse selection problem facing uninformed traders. Not only do the dual-class IPOs (relative to single-class) experience significantly lesser underpricing at the time of IPO, but also appear to enjoy improved liquidity during the 250 trading days following the IPO. The dual-class firms have significantly smaller bid-ask spreads, trade-to-trade price volatility, average trade size, and larger average volume turnover ratio.

Pages

123

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