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

The impact of institutions, ownership structure, business angels, venture capital and lead managers on IPO firm underpricing across North Africa

“…Here separation of ownership from control is largely as envisaged by Berle and Means (1932) through widely dispersed principals (owner-shareholders) and managerial agents incumbent to the firm. This is also a critical implicit assumption in the "insider control" hypothesis first proposed by Brennan and Franks (1997) within the context of the UK equity market. However significant evidence questioning this form of separation of cash flow ownership from control (voting rights) was first raised by Claessens et al (2000) in a study of East Asian corporations.…”

“…In direct contrast to the "reduced monitoring hypothesis" argument of Brennan and Franks (1997) for lead managers with elevated reputation, signalling arguments dominate in terms of the employment of foreign lead managers by IPO firm. Foreign lead managers are better placed to signal quality in part to domestic investors through their ability to act as a conduit for international best practice in terms of governance and transparency but also in terms of marketing ability in being able to attract overseas investors through the enhanced visibility, reputational capital and recognition of their brand.…”

“…Using a unique and comprehensive hand-collected sample set of 86 IPO firms from across North African equity markets, namely Egypt, Morocco, Tunisia and Algeria from 2000 to 2013 I find substantial evidence supporting the Brennan and Franks (1997) insider control hypothesis. While certification effected are likely achieved through IPO firms engaging with foreign VC managers leading to a reduction in underpricing the opposite is true of domestic VC.…”

“…These single country studies are overwhelmingly dominated by those focussed on large developed US IPO market (e.g. Zutter, 2003 andArthurs et al, 2008) alongside other developed markets such as UK (Brennan and Franks, 1997) and more recently UK and France (Bruton et al, 2010) and Germany (Tykova and Walz, 2007). It is only more recently that a cross country comparative literature has started to emerge seeking to elaborate on the institutional and corporate governance (at legislative level) differences that impact on often considerable variations in IPO underpricing in worldwide equity markets (see Boulton et al, 2010).…”

“…In this light IPO underpricing can be viewed as the permissible degree of wealth transfer that controlling insider groups are prepared to accept in order to retain control. In terms of the highly socially networked economies of Maghreb region it is reflective of the softer extension of control across more disparate entities and firms constituent to extended family business groups, such as shared directors, mutual socialization of boards, shared CEO and Chairpersons as well as elaborate network of pyramid and cross-shareholdings as opposed to the concentrated cash flow ownership within firm as envisaged by Brennan and Franks (1997) and Smart and Zutter (2003). A further key finding is that IPO underpricing across North Africa's socially networked economies is strongly associated to institutional quality, as defined by the six well-established World Bank Governance measures.…”