ID number/name: Audun Fagerstrøm Skattum Mats Erik Strand
BI Norwegian Business School – Thesis
- IPO Underpricing and family controlled firms –
A study of the Norwegian market
Mats Erik Strand and Audun Fagerstrøm Skattum
Campus: BI Oslo
Date of submission:
02.09.2013
Supervisor:
Siv J. Staubo
Examination code and name: GRA 19003 Final Thesis
Programme: Master of Science in Business and Economics, major in Finance
This thesis is a part of the MSc programme at BI Norwegian Business School. The school takes no responsibility for the methods used, results found and conclusions drawn.
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Acknowledgement
We would like to thank our supervisor, Siv J. Staubo for her helpful guidance in
writing this thesis. For helping with the collecting of data we thank Center for
Corporate Governance Research (CCGR). We would also thank those around us
who have given us a language revision and supported us through the process.
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Abstract
This paper examines how the ownership structure and corporate governance
mechanism in family controlled firms may affect the underpricing during an IPO
process in the Norwegian market.
The result from the quantitative method shows that family controlled firms have a
lower underprice when conducting an IPO, compared to non-family controlled
firms. By testing for firm age and gross proceeds, we find that family controlled
firms do have less information asymmetry, and this causes a lower underprice.
However, we do not find any evidence saying that a lower agency conflict in
family controlled firms will influence underpricing.
Surprisingly the underwriter rank seems to affect underpricing differently
depending if the firm are controlled by a family or not.
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1 Content Acknowledgement ................................................................................................... 2
Abstract .................................................................................................................... 3
1 Introduction...................................................................................................... 6
2 Literature review .............................................................................................. 8
2.1 Asymmetric information ........................................................................... 8
2.2 Agency conflict and allocation of shares ................................................ 10
2.3 Behavioral explanations .......................................................................... 11
2.3.1 Cascades: ......................................................................................... 12
2.3.2 Investor sentiments .......................................................................... 12
2.3.3 Prospect theory ................................................................................ 12
2.4 Why take a firm Public ........................................................................... 13
2.5 Family controlled firms ........................................................................... 14
2.6 Other empirical studies on the topic. ...................................................... 17
3 Hypothesis ..................................................................................................... 17
3.1 Hypothesis 1: Family controlled firms are less underpriced than
non-family controlled firms are . ................................................................ 17
3.2 Hypothesis 2: Higher firm age will result in lower underpricing. .
................................................................................................................. 18
3.3 Hypothesis 3: Proportion of shares issued and issue size will
affect the underprice. ................................................................................... 19
3.4 Hypothesis 4: Family member as CEO will reduce agency
conflicts, resulting in lower underprice. ................................................. 20
4 Variables ........................................................................................................ 20
4.1 Dependent variable ................................................................................. 20
4.2 Independent variables ............................................................................. 21
5 Data collection ............................................................................................... 24
5.1 Criteria for Our Data ............................................................................... 25
6 Descriptive ..................................................................................................... 26
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7 Methodology .................................................................................................. 32
8 Regression analysis ........................................................................................ 35
8.1 Results hypothesis 1: ............................................................................... 35
8.2 Result hypothesis 2: ................................................................................ 37
8.3 Result hypothesis 3a ............................................................................... 38
8.4 Result Hypothesis 3b .............................................................................. 39
8.5 Result hypothesis 4: ................................................................................ 40
8.6 Result from control variable ................................................................... 40
9 Robustness test .............................................................................................. 42
10 What could be improved? .............................................................................. 42
11 Conclusion ..................................................................................................... 43
12 References ....................................................................................................... 45
13 Appendix........................................................................................................ 49
13.1 Appendix 1 – IPO and closing price. .................................................. 49
13.2 Appendix 2: Underwriter rank ............................................................ 51
13.3 Appendix 3: Residuals......................................................................... 52
13.4 Appendix 4: Correlation matrix .......................................................... 52
13.5 Appendix5: Robusteness test............................................................... 53
13.6 Appendix 6: Preliminary thesis ........................................................... 54
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1 Introduction
In this thesis we are investigating the relationship between the ownership structure
and the underpricing related to initial public offering in the Norwegian market,
more specific: the difference between family firms and non-family controlled
firms. We will look at the different factors that can affect the underpricing when
conducting an IPO and relate this to the structure of firms controlled by families.
Underpricing in an initial public offering is a well-known phenomenon and has
been subject for many research papers. As early as 1975 Roger G. Ibbotsen found
evidence of underpricing in initial public offerings, but could not explain why it
occurred. “Strangely enough, we have not solved the mystery of the empirically
observed underpriced new issue offerings.” (Ibbotsen 1975)
However, there are little research on the topic concerning family controlled firms
and valuation when they are conducting an IPO.
Even though research on underpricing and IPOs has been a popular research topic
for decades, the transformation from private to public firm have yet to become
clear. There has been a lot of research on the determinants of underpricing trying
to explain why this phenomenon occurs, but a lacking understanding on what is
the corporate governance mechanism that will have an effect under an IPO
process.
Exploring the IPO performance in family controlled firms can give investors
important insights on how to evaluate different investment objects.
In this thesis, we will focus on how the ownership structure can affect information
asymmetry and agency conflict between owners, management and underwriter.
We will also focus on theories regarding the owners desire to maintain control
over the firm.
By using data on 46 Norwegian listed firms, we have investigated how the
different causes of underpricing are related to family controlled firms.
Our main findings show that that family controlled firms with ownership larger
than 25% have a lower underprice when conducting an IPO, compared to non-
family controlled firms.
By testing for company age and gross proceeds, we find that family controlled
firms do have less information asymmetry, and this causes a lower underprice.
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However we do not find any evidence saying that a lower agency conflict in
family controlled firms will influence the underprice.
Surprisingly the underwriter rank seems to affect the underprice differently
depending on the company are controlled by a family or not. A lower ranked
underwriter cause a lower underprice for family controlled firms and vice versa
for others.
This thesis can shed light onto the control and operational differences between the
two groups of family controlled firms and non-family controlled firms, and could
be interesting for both academics and investors.
Research has shown that family controlled firms have different behavior from
non-family controlled firms and these behavioral differences complicate the
investors’ effort to evaluate the quality of family controlled firms. These
differences will also help families to seek means to best preserve the value of
stocks and assets of the firm. By putting effort in areas of corporate governance
and produce positive signals, management and owner may enhance the value of
the firm.
In this paper, we will first go through literature and research on the topic of family
firm and IPO underpricing, before we present hypothesis and data. Finally, we
will review the results from the regression and the conclusion.
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2 Literature review
The phenomena of short-term underpricing in an IPO process is a well-
documented subject and has been a topic in research for decades.
In the article “A review of IPO Activity, pricing, and Allocations”, Ritter and
Welch (2002) explain the plausible causes of short-run underpricing. They focus
on theories based on asymmetric and symmetric information, theories based on
allocation of shares, agency conflict and behavioral explanations
2.1 Asymmetric information The theory of asymmetric information has been a popular theory among
researchers and was first explained by Grossman (1976).
The issuer is more informed than the investor and tries to stand out as a good
investment object, by signaling either high or low quality. High quality issuers are
selling at a lower price and will try to recap the loss in the future. This is a game
between the issuer and investors, the issuer trying to reveal the investors
valuation, while the investor tries to identify the true value of the firm. The
investors who want to pay a high price will require something in return to show
their willingness and the issuer will present a “gift on the table” in form of a lower
price (Ritter and Welch 2002). This theory is supported by Benveniste and Spindt
(1989) and their model of information acquisition saying an investor must be
rewarded to reveal their true demand during a book building period.
Leland and Pyle (1976) argues that because of moral hazard and exaggerated
quality, lenders have difficulty revealing the true characteristics of borrowers and
see which project are of good or bad quality. However, they suggest that the
action of the lender will speak louder than words. An entrepreneur has more
information about the expected future cash flow and is signaling high quality by
investing in the project. His willingness to take up a greater share of the equity
and thus a larger welfare loss may lead to the leveling of information asymmetry.
Another approach is to assume the investors are more informed than the issuers,
for example about the market demand. Assuming investors are equally informed
could explain why they purchase at a lower price, knowing they all want to make
profit and will request those issues that are valued at a significant lower level
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relative to real value, but according to Ritter and Welch (2002) this could not
explain the phenomena of an overpriced IPO.
Rock (1986) show on the other hand that underpricing is a result of differentially
informed investors. The issuer and the underwriter possess more information
about the firms anticipated performance in the future than each investor possesses
individually, but will have less knowledge than all investors combined. Whereas
uninformed investors tend to bid randomly, and informed investors only bid on
favorable priced IPO. However, there are few informed investors in the market,
forcing the issuing firm to lower their prices to enable sales among the
uninformed investors and keeping the issued shares fully subscribed. Setting the
price down will increase the demand from uninformed investors, create
oversubscription and the need for rationing occurs. The demand from uninformed
investors continues to increase to the point where all subscriptions are made by
uninformed investors. At this point, a lower price can reduce the probability to get
an allocation, leading uninformed investors to withdraw. The uninformed
investors will on average have abnormal return equal to zero. This theory is
according to Ljungqvist (2007) similar to the theory of winner’s curse, where the
winning bid will be largely overvalued.
Loughran and Ritter (2002) explain the phenomena of underpricing as the indirect
cost of having an underwriter. The issuer puts money on the table instead of
bigger fees to the underwriter. Their survey showed that IPOs with high
underpricing often had a lower initial valuation, but was priced higher as a result
of high demand for the IPO. The investors will be less critical to high
underpricing since their initial value has increased.
However, Ritter and Welch (2002) are unsure of how this value is divided
between the issuer, underwriter and the investors.
According to Ritter and Welch (2002) all theories on asymmetric information are
based on the assumption of correlation between asymmetric information and
underpricing. They indicate that the only way this can be done is to sell bundles of
both hot and cold issue to investors. They also point out that empirical research is
showing underpricing to be higher than the cost of bundling.
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Theories on symmetric information are often based on the issuer’s fear of
litigation. With a higher price the probability that the share is overpriced increases
and the issuer will sell their shares at a lower price to avoid lawsuit from outside
shareholders in the future (Ritter and Welch 2002). Nevertheless, this will
according to Ljungqvist (2007) only be a second-order driver for underpricing.
2.2 Agency conflict and allocation of shares Even though asymmetric information and symmetric information has been a
popular theory among researchers, Ritter and Welch (2002) claims that these
theories do not count for all underpricings.
They argue that underpricing can be explained by the agency conflict between the
issuer and the underwriter, the share allocation on one side, and the behavioral
explanation on the other side.
An interesting question is “How do investors decide in which issues to request
IPO allocations, and how heavily influenced is this by perceptions of what others
are going to do?” (Ritter and Welch 2002).
Arthurs et al (2008) describes the relationship between owner managers,
underwriter and venture capitalists and how there exist a multiple agency conflict
between the parties and not only the classical conflict between
owner/management and large shareholders/small shareholders.
The management together with the underwriter will determine the issue price, but
may have different incentives for the price level and allocation of shares.
The management may use the IPO as a mean to maximize own utility level on the
expense of future shareholders and non-managing shareholders. (Ljungqvist 2007)
In addition, the connection between underwriters and investors are questioned.
Arthurs et al (2008) argue that financial banks are better off having a long-term
relationship with the institutional investors and underpricing is a method to
maintain such a good reputation. They will also benefit from being responsible for
allocation decisions. The underwriters will have different incentives than the
managers and firm owners that have hired them.
However Carter, Dark and Singh (1998) and Michaely and Shaw (1994) have
done research on the connection between underwriters reputation and
underpricing. They find evidence that high underwriter reputation is associated
with lower short-term underpricing.
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According to Ritter and Welch (2002) the theories on allocation of shares has
been a more popular explanation among researchers, particular the allocation of
shares to institutional investors and individual, due to the big size of money left
on the table. Shares in an IPO are allocated to investors willing to buy the shares
and can be done either by auction, fixed-price offer or a book-building method.
By going public the issuer are taking a step further in the direction of separation
between ownership and control, and issuers may have different incentives for how
the new ownership structure and separation of power should be carried out.
Brennan and Franks (1997) find evidence that underpriced IPO tend to be
oversubscribed. They argue that underpricing increases the demand and gives the
issuer the opportunity to discriminate the allocation of shares and often in favor of
small applicants to prevent the allocation of large blocks and prevent new large
shareholders. This strategy gives the issuer the opportunity to maintain control of
the firm after the IPO is finalized.
However Habib and Ljungqvist (2001) advance another explanation and argue
that some IPOs are less underpriced because the owners have strong incentives to
keep a high price level. Owners who sell a big proportion of their shares will have
more to lose and this gives an incentive to put a lot effort and money to avoid high
underpricing, while owners issuing a smaller proportion of shares will care less
about the underpricing.
2.3 Behavioral explanations
Researchers are concerned of how much of the first day return could be explained
by asymmetric information, agency conflict or allocations of shares. They have in
recent years focused on behavioral explanations for underpricing. The theory on
behavioral explanations is based on either the irrational investor bidding up the
price above the true value or the “smart” issuer who see opportunities when the
market is biased (Ljungqvist 2007). Ljungqvist (2007) describes four possible
theories on how behavior could affect the short term return as cascades, investor
sentiments and prospect theory and mental accounting.
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2.3.1 Cascades:
Ljungqvist (2007) explain how cascades leads to investors exclude their own
information and are basing their investment decisions mainly on investors
previous purchase. This gives market power to investors in an early stage, and
provides these investors the authority to demand a lower IPO price. To secure that
negative information from one investor reach others, the underwriter has to ensure
there is no free float of information.
2.3.2 Investor sentiments
Ljungqvist (2007) examines the theory of sentiment investors and argue that the
effect on first day return may be significant when firms go public. Because of the
difficulties of valuating IPO firms, the overoptimistic investor will tend to drive
the price up. However, this overvaluation will create losses in the long run. Ritter
(1991) have investigated the long run performance on IPOs and argues that over
optimism among investors, when a firm goes public, leads to a negative
performance over a three-year period. According to Ljungqvist (2007) the issuer
will seek to maximize the value over fundamental value and will withhold a larger
proportion of shares, creating a higher demand among sentiment investors.
Ritter and Welch (2002) describe how some investor sentiment could drive up the
prices and overvalue the firm because they are too optimistic. A “smart” issuer
will tend to issue shares or take the firm public when they sense investors are to
overoptimistic about the market. This model assumes that firms going public in a
hot market will have more underpricing than firms going public in a cold market.
Loughran and Ritter (2002) measured if the market is hot or cold after the amount
of IPO’s in a certain year.
2.3.3 Prospect theory
High underpricing will also according to Ritter and Welch (2002) lead to a higher
number of new issues, because of the encouragement from underwriters who see
the high valuation as an opportunity for the issuer to make money.
Ritter and Welch (2002) examine why issuers are willing to leave so much money
on the table and explain this by prospect theory. The issuer will easier see the
wealth gain caused by the price increase, after the IPO, than the wealth loss
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created by an issue price lower than true value. If the wealth gain outweighs the
wealth loss, issuer will be willing to leave millions of dollar on the table.
Ljungqvist (2007) goes through the empirical evidence for these theories. He
shows that research supports the theories on cascades and investor sentiment, but
is more inconclusive on the topic of prospect theory. He also points out that there
has to be done more research on the area of behavioral explanation for
underpricing.
Ritter and Welch (2002) argues in their article that the classical theories on
information asymmetry, agency conflicts and allocation of shares will have
greater explanatory power on the short term underpricing while behavioral
explanations have a greater effect on the long term underpricing.
2.4 Why take a firm Public
There are several differences between a family controlled firm both in the
structure of ownership and their motives to conduct an IPO.
Ritter and Welch (2002) describe the reasons why a firm wants to go public by the
motive to raise capital and the desire to trade at a public market place. Mainly a
firm conducts an IPO so they can raise capital, to be able to invest in positive
NPV projects, or to satisfy the owners need for capital. In a family firm, some
family members sell parts of their shares for personal reasons, while in non-family
firms owners can use the situation to get a more diversified portfolio. Ritter and
Welch (2002) also look at different theories in the life cycles of the firm and
market timing, and explain how market timing may be important for the issuing
firm. They also points out that some firms may benefit from going public when
they reach a certain stage in their life cycle due to the benefits of being a public
firm. Hsieh, Lyandres and Zhdanov (2011) link the life cycle and IPOs against to
a takeover strategy. They argue that a firm’s true value only will be revealed when
they are listed on a public stock exchange, and by conducting an IPO the firm may
easier be spotted as a takeover subject. Ritter and Welch (2002) argues that an
entrepreneur will get a higher price after an IPO because the acquirer will have
difficulties to pressure the price when they in addition have to negotiate with
outside investors. Although, according to Bancel and Mitoo (2009) an IPO may
not always be an exit for the entrepreneur. In their research they show that M&As
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are not the main cause for family controlled firms. However, these firms main
reason to go public is an attempt to rebalance the power between bankers and
creditors without the family losing control over the firm.
When a firm reach a certain stage in its lifecycle, it could be beneficial to go
public for example to expand. Publicity and also the advantage of being the first
in its industry are also vital reasons.
By going public, the owners often sell a part of the firm to new shareholders,
which could have been done by selling in the private market. Selling shares
privately to several new shareholders would make the owners able to negotiate the
price and then receive a higher price for their stocks. However Chemmanur and
Fulghieri (1999) argues that this would not be efficient since the evaluation cost
would become too high compared to the information cost of going public, and
further more making the stock price lower, compared to an IPO.
Zingales (1995) points out that the initial owner could use the IPO to be able to
restructure his position in the firm, and being able to sell out the proceeds he
wants to maximize. Many entrepreneurs seizes this opportunity to “collect the
prize” of their work and sell the firm.
However, Litz (2004) explains the importance to distinguish between family firm
and entrepreneurs and refers to later research in entrepreneurship, showing the
entrepreneur to be different in the management from the organization in family
firms.
2.5 Family controlled firms The key difference between a family controlled firm and a non-family controlled
firm is the separation of control between management and owners. In a family
controlled firm, family members will have active participation as both owners and
in the management team in contrast to non-family controlled firms where the
separation between management and owners is absent. (Chambers. 2012).
Anderson and Reeb (2003) argues that a family firm is separated from a non-
family firm by the amount of shares the founding family represents and whether
they are to be found in the board of the firm. However, it is not definite how large
share of the firm the family has to possess. In their paper, they show an example
where the controlling family had as little as 2% of the shares, and still were the
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majority owner. Bøhren (2011) states that the definition of family controlled firms
are firms where the family possesses more than 50 % of the shares. He explain
that it is difficult to set the exact line for when a firm is classified as a family
controlled firm or not. Changes of statutes often require a majority of two-third.
Nevertheless, he points out that not all shareholders turn up in the general
meetings. Therefore the family may have control with lower than 50% ownership.
This is supported by La Porta, Lopez-de-Silanes and Shleifer (1998). They argue
that a definition of a family controlled firm is a firm where a family owns 20% or
more of the shares. NHO are also seeking for å new definition of Family
controlled firms and are working for a common European definition for family
controlled firms, where a family controls 25% or more of the firm (NHO 2008)
Anderson and Reeb (2003) explain how the amount of CEO ownership affects the
firm risk and states that the amount of management which also owns a part of the
firm is greater in a Family controlled firm than in a non-family controlled firm. If
the managers have shares in the firm they will carry part of the risk when
conducting an IPO. Ljungqvist (2007) indicate that the agency cost will diminish
when the ownership is so large that it may outweigh the private benefits. The
agency conflict between owner and underwriter can also be reduced when both
management and owners have the same incentive for the price level.
Anderson and Reeb (2003) present another advantage of having owners as
managers, and explain why family firms have higher profitability than non-family
controlled firms, because the CEO position is held by one of the family members
who understand the business. They conclude that when the owner both control
and lead the firm, the agency cost will conclusively be reduced and the firm will
perform equally or superior to non-family controlled firms. This is supported by
Villalonga and Amit (2006) who conclude that family controlled firms are more
profitable than other firms are. They state that value is added when the founding
owner serves as the CEO or as the chairman of the board. However they find no
evidence of this added value when the inheritors serve as the CEO or chairman.
The value created when founding owner controlled the firm seems to deteriorate.
They also claim that the agency cost created of the conflict between the family
and minority shareholders are smaller than the conflict between management and
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shareholders in a non-family controlled firm. However, they find that the low
agency cost between family and non-family firms, will similarly to the
profitability, deteriorate when the heritage are in control.
Bøhren (2011) have done similar research in the Norwegian market. He
discovered evidence of family controlled firms being more profitable than other
firms, but this premium disappears when the numbers are adjusted for other
factors that could have an effect on the profitability.
According to Chambers (2012) the success of family controlled firms are based on
the family business ability of long-term thinking. The family’s wealth depends on
the value of the firm, and the strategy for the family is to take board decisions,
making sure the persistence of the firm through generations This could benefit in
a more stabile valuation of the firm, leading to less information asymmetry. (Litz
2004).
Bøhren (2011) explains how the family members’ income and wealth are based on
salary; dividend and the value from one single firm, and not a diversified portfolio
like other investors tend to have. The risk of not being diversified has to be
reduced within the firm through the key processes of stabile income, low level of
fixed costs and a low debt ratio. Bøhren (2011) refers to a Norwegian study done
by Svalland and Vangstein (2011) where they find evidence that family controlled
firms have a significant lower operational risk. This could be explained according
to Bøhren (2011) by the involvement in the operations by the owner.
Bøhren (2011) argues further that family controlled firms going public are rare,
but some of the largest firms on the stock exchange were in fact controlled by
families at the time they went public, and some are still family controlled after the
IPO
When a family firm requires capital and this is done trough an IPO the founder
will according to Chambers (2012) find it hard to adjust to a partial ownership.
Selling to many shares leads to the loss of control of the firm. To retain a majority
of shares within the family the proportion of shares issued and the allocation of
shares have to be carefully determined.
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2.6 Other empirical studies on the topic. Daugherty and Jithendranathan (2012) found that family firms are less
underpriced than non-family controlled firms in the US market between 1996 and
2004. They explain the difference by diverse ownership structure and argue that it
is the effectiveness of managers in the family firms who achieve less
underpricing. However, Ding and Pukthuanthong-Le (2009) found evidence by
examine the Taiwan stock market that lower underprice occurs when an outsider
as CEO managed the family firm. It is clear that the ownership structure will have
various impacts on the underpricing in different markets. In both studies the age
of firms conducting an IPO has been tested upon. They found similar results, that
firms which are older, has lower underpricing when conducting the IPO. A main
difference between these two studies is the age of the two markets. The Taiwan
market does not have so many long lasting firms, while the US market has more
history and firms with longer lasting owners. (Ding and Pukthuanthong-Le 2009)
3 Hypothesis
First, we want to test if family controlled firms are more underpriced than non-
family controlled firms are. Second, we want to test the determinants for
underpricing and relate these to the structure and mechanism in family controlled
firms.
Our hypothesis’ are based on asymmetric information and how the skewed
information between issuer and investor will lead to a higher underprice. In
addition, we will test for agency conflict and see the effect on underpricing in
family controlled firms.
3.1 Hypothesis 1: Family controlled firms are less underpriced than
non-family controlled firms are .
Family controlled firms have shown to have different structure and motive for
going public than non-family controlled firms (Chambers 2012, Bancel and Mitoo
2009).
Ritter and Welch (2002) and Rock (1986) among others, have argued on how the
information asymmetry would be the cause of underpricing. We believe that
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Chambers (2012) argument on how families have a different strategy, causing a
more long-term thinking and the reduced operational risk explained by Bøhren
(2011) will lead to a reduced information asymmetry, causing a lower underprice.
In addition, the controlling family will often use the IPO as a chance to restructure
the firm and meet its commitments to creditors, and not collect their “price” as an
entrepreneur more easily will do. (Bancel and Mitoo 2009). Often, most of the
controlling family’s wealth is within the firm, and they will try to maximize and
maintain their wealth by choosing their right strategy. Following Habib and
Ljungqvist (2001), the desire to maintain the family’s wealth and simultaneously
restructure at retain control may give the family incentive to struggle more in an
attempt to keep the underprice low.
Result presented by Daugherty and Jithendranathen (2012) showed that family
firms in the U.S. market experienced a lower underprice when they conducted an
IPO.
Some of these factors will be investigated further in the three following
hypotheses, trying to explain why family firms could be less underpriced.
3.2 Hypothesis 2: Higher firm age will result in lower underpricing .
As shown in the previous chapter the information asymmetry will be reduced by
the approach of long-term decision making. When conducting an IPO the
information and valuation process is costly. Past data are used when evaluating
the firms total value, and less past data could make the evaluation harder (Ritter
1984). This mean that the age of the firm will affect the underpricing of the firm.
Maturity of the firm when conducting an initial public offering has been in several
studies used to describe how established the firm is. Daugherty and
Jithendranathen (2012) and Ding and Pukthuanthong-Le (2009) has found in their
two separate markets that the older the firm is, the less underpricing occurs. We
also get from Rock (1986) that risk is related to underpricing, in such term that
underpricing increase with higher risk of a firm. By these negative effects on
underpricing, age could be a proxy of information asymmetry, since information
asymmetry will decrease when age increase.
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3.3 Hypothesis 3: Proportion of shares issued and issue size will
affect the underprice.
3a: Higher offer size will lead to a higher underprice.
3b: Higher proportion of shares sold by the controlling family will lead to a
higher underprice.
In an initial public offering it differ a lot of how many percent of their shares the
issuing firm offer to the public. Techniques like issuing fewer shares and use
underpricing as a tool to control the allocation of shares, gives a family the
opportunity to restructure and maintain the control of the firm. This hypothesis
support Rock (1986) theories on asymmetric information and the need to lower
the price in an attempt to both reveal the investors own valuation and attract both
informed and uninformed investors. At the same time, the controlling family want
to maintain control after the IPO (Chambers, 2012), and is willing to lower the
price in an attempt to discriminate the shares against institutional investors and
prevent large blocks (Brennan and Franks, 1997). This theory indicates that
family controlled firms will issue less shares compared to non-family controlled
firms, leading to a lower underprice when they take the firm public. The size of
the issued shares and the price will be a weighted decision between the family’s
desire to maintain control or maximize the gross proceeds. This is consistent with
Michaely and Shaw (1994) who finds that higher size of the issue is related to a
higher underprice. By separating the hypothesis into two subgroups, we are able
to examine more closely, both the effect of offer size and the signaling effect
caused by proportion of shares sold by the controlling family.
In hypothesis 3b, we want to test if the proportion of shares sold by the controlling
family will affect the investor’s perception about the long-term strategy presented
by Litz (2004) and the lower operational risk in family controlled firms explained
by Bøhren (2011), and relate these factors to the risk of investing in the firm.
According to Leland and Pyle (1976), a reduction in the entrepreneur’s ownership
will send a signal of low quality, which could lead to a higher underprice.
Final Thesis GRA19003 02.09.2013
20
3.4 Hypothesis 4: Family member as CEO will reduce agency
conflicts, resulting in lower underprice.
This hypothesis follows Arthurs et al (2008) argument saying that the agency
conflict between both owner and manager and the agency conflict between owner,
management and underwriter could be reduced when a family member possesses
the CEO position. This reduced agency cost could according to Ritter and Welch
(2002) lead to a lower underprice when a firm goes public.
The variable fam_CEO and ult_fam tests the relationship between underpricing
and the amount of family involvement in the management. If involvement from
family ownership occurs in a firm, Anderson and Reeb (2003) argue that it is
likely to decreases agency cost. They point out that the advantaged increases
when the CEO position is held by either a family founder or a hired-hand. It is
assumed that both these variables will have a negative effect on underpricing.
4 Variables
4.1 Dependent variable
Underpricing
Underpricing (UP) serves as the only dependent variable in all of the regressions
in this thesis.
The variable is based on the same variable used by Ritter (1991), Ljungqivist
(2007) among others, and was first discovered and referred to by Ibbotson (1975).
Underpricing refers to the price per share before the listing of the firm, called the
offer price (OP), and the difference between the price or real value set by the
market the first trading day; called the Closing price (CP). Ritter (1991). The
underpricing is mathematically the percentage difference between the offer price
and the closing price, and is often referred to as the first day return.
(CP-OP)/OP
If the IPO price is lower than the closing price first trading day the issuer will find
that the firm has been sold to a lower price than real value.
Final Thesis GRA19003 02.09.2013
21
In this thesis the underpricing will be have a positive sign while overpricing is
notated with a negative sign. A higher price increase the first trading day reflects
an equally large underpricing.
4.2 Independent variables
Firm age (Ln_age)
Firm age (Ln_age) is used as an independent variable in all of the following
regressions, and is used to test for hypothesis 2. Rock (1986) express that there is
an underlying risk which is connected with underpricing, indicating that
underpricing occurs due to different kind of risks. The less past data a firm has,
the more inaccurate or risky the price becomes to measure, giving more
information asymmetry according to Ritter (1984). A common key factor of
possessing less past data would be to be a younger firm, which has not existed for
many years. Consequentially the age of a firm would be a preferable proxy to
measure risk, which could explain how more information provide a more accurate
price. In our regression, age is defined as the natural logarithm of 1 plus (Date of
IPO minus the year it was founded).
Offer size (Ln_Offersizeis)
Offer size (Ln_Offersizeis) the independent variable used to test for hypothesis 3a
and how the gross proceeds will affect the underprice. This variable is defined as
the natural logarithm of offer price multiplied by number of shares issued (NSI),
which is the same as gross proceeds. Michaley and Shaw (1994) found that gross
proceeds are negatively correlated with underpricing. Gross proceeds is also used
by Habib and Ljungqvist (2001) and Beneviste and Spindt (1989) where offer size
was used as a measure of risk. By using gross proceeds as proxy for offer size, we
want to see how this variable will affect underpricing in the Norwegian market.
Log(NSI*IPO price)
Family dummy variables
Dummy variables for family ownership the year before conducting IPO – Fam_50
is a dummy variable used in the first regression with the value of 1 when ultimate
family ownership is over 50% and value of 0 when under 50%. By using family
Final Thesis GRA19003 02.09.2013
22
ownership as a dummy variable, we will be able to see how a firm with ownership
above 50%, effects underpricing UP in our regression. 50% is the requirement for
a firm to be classified as a family controlled firm due to theory by Bøhren (2011)
In regression number two, the requirement for the dummy variable of family
ownership is decreased from 50%, to 25%.This variable (Fam_25) is in coherence
with research by La Porta, Lopez-de-Silanes and Shleifer (1998) and NHO
(2008). It is interesting to uncover if there could be any difference in the outcome
by using 25% and 50%in the regression. By dropping the requirement we also
assume additional number of firms in the sample.
These variables are used to test for hypothesis 1.
Ultimate ownership by families (Fam_Ult)
To do a more thorough investigation whether or not family ownership has impact
on the underpricing we have also added a variable that shows the ultimate family
ownership, as a percentage of total outstanding shares. By using ultimate
ownership as the family ownership variable, we will see how an increase in
ownership effects underpricing.. This variable is measured as the natural
logarithm of the percentage of shares owned by families in the firm.
Used as a additional variable to test for hypothesis 1.
Controlling family has CEO (Fam_Ceo)
This variable will capture if the controlling family possesses the CEO position
with one of their family members, and measure this effect against the
underpricing when the firms goes public, and is used to test hypothesis 4. This
will be a dummy variable, 1 if the controlling family has the CEO and 0 if the
CEO position is held by a CEO outside the family. This variable is based on the
theory by Andersoon and Reeb (2003), where they uncover how agency cost in a
firm tends to diminish when a family member serves as the CEO. This variable
could disclose whether or not the CEO could have an effect on underprice.
Ownership of CEO (Own_Ceo)
This variable is used to conduct a more thorough analysis of the CEOs effect on
underpricing and is a supplement to the Fam_Ceo, to determine whether there is a
reduced agency conflict in family controlled firms.
Final Thesis GRA19003 02.09.2013
23
This variable is to measures the effect of having a CEO with a large ownership.
Estimated in percentage of shares owned by the CEO it is used in all three
regressions to detect any effect the CEO has to enhance underpricing.
Proportion of shares sold out by the controlling family (Prop_Sold)
Prop_Sold is a variable made to reveal how the proportion of shares sold by the
controlling family, affects the underpricing in all three regressions. This is
calculated as the percentage difference between the ultimate ownership the year
the IPO occur (Ot) and the ultimate ownership the year before the IPO (Ot-1).
(Ot-Ot-1)/Ot-1
This variable will capture the signaling effect, inspired by Leland and Pyle (1976),
and is used as a determinant in hypothesis 3b.
Underwriter ranking (Ln_Uw)
Ln_Uw serves as the variable for underwriter rank. This variable is used as a
control variable in all of the regressions.
There are several ways to calculate the underwriter ranking, and Carter Dark and
sing (1998) explains three possible methods; the Carter and Manaster (1991)
method, a modification of this method made by Johnson and Miller (1998) and the
Megginson and Weiss (1991) method. They find all methods to be significant
against underpricing when tested individually, but only the method described in
Carter and Manaster (1991) is found significant when they were tested
simultaneously . This method is according to Carter Dark and Sing (1998) the
most superior way to estimate the quality of underwriters, ranking underwriters
from 0-9 depending on which section they were listed on tombstone
announcements. In spite of the superiority of the Carter and Manaster method,
Carter Dark and Sing (1998) argue that this method requires more effort to
construct.
This method could be difficult to adapt to the Norwegian market, where there are
smaller syndicates and often only one underwriter per issue, resulting in a
distorted view of the quality of financial banks. We have therefore chosen to use
the method presented by Megginson and Weiss (1991). The quality of each
underwriter is measured as the percentage of the total amount brought to the
market. If the underwriter has more than one lead underwriters when conducting
Final Thesis GRA19003 02.09.2013
24
an IPO, the average quality of the underwriters are used as a proxy (see appendix
2 for complete list).
The underwriter ranking are based on 191 IPOs in the Norwegian market between
2001 and 2010 and are divided into three subgroups. 2001-2004, 2005-2007 and
2008-2010. In contrast to research done by Megginson and Weiss (1991) and
Carter and Manaster (1991) this sample is fairly modest. Their sample consisted
of 640 and 501 IPO’s respectively, and it is uncertain that we will get a satisfying
result based on only 191 observations. However, we believe that even with a quite
constricted sample, we can retrieve enough information to attain an indication on
the variables’ influence on underpricing.
5 Data collection
The data is based on a sample of IPOs listed on Oslo stock exchange in the years
between 2001 and 2010, both from Oslo Børs and Oslo Axess.
Our primary source of data for the short term return has been different news and
equity feeds provided by Oslo stock exchange via the department of Finance at BI
in addition to Thomsen Reuters DataStream. The Offer prices could unfortunately
not to be found in any systematic database, and we had to look through different
sources to be able to create a database. Most of them were collected in the news
web provided by Oslo stock exchange, Equity Feed provided by BI (originally
from Oslo Stock exchange) and Prospectus provided by the issuing firm. (See
appendix 1 for complete list of firms). All family variables and foundation dates
are collected from the CCGR database. This database contains information on
Norwegian firms with limited liabilities. However there are some missing data on
some firms, leading to fewer observations. We have not given priority to collect
and update the family variables because these data’s are considerably intricate to
find and may vary from those already existing in the CCGR database.
In the period between 2001 and 2010, there were 211 new listings on Oslo stock
exchange. Because many of these firms are foreign or are listed due to merger or
demerger, these firms have been excluded. Our analysis is based on new listings
on Oslo Stock exchange between 2001 and 2010. From this sample there are 125
with IPO and closing prices available.
Final Thesis GRA19003 02.09.2013
25
5.1 Criteria for Our Data Norwegian firms conducting an IPO between 2001 and 2010.
- Available information on the IPO
- IPO price
- Total number of shares
- Number of shares issued
- Closing price first trading day
- Data on Underwriter / financial bank
- Not firms already listed on the stock exchange doing a merger or demerger
- Not firms that have been listed and then delisted a few years pre the
second time listing.
- Family Data both the same year and in front of the IPO
Because of these criteria, the firms had to be older than one year in front of the
issuing data.
In addition we have removed banks and financial institutions due to the
Norwegian regulation of the financial sector and their ownership structure. There
are formal requirements of the ownership structure for financial institutions saying
that one owner is not allowed to hold more than 10% of the equity (Bøhren and
Ødegaard 2002)
When these criterias are taken into account, we are left with only 46 firms from a
total of 211. We have not specifically selected firms, but the modest number of
firms are mainly due to missing data on the family variables. Particularly the
requirement of data pre and post the IPO resulted in the loss of observations due
to the difference in reporting of Public and not public firms.
Final Thesis GRA19003 02.09.2013
26
6 Descriptive
The annual amount of IPOs is presented in table 1 and it is clear that the sample of
family controlled firms larger than 50% are relatively small. In total there has
been 21 family controlled firms larger than 50% and 46 with family ownership
larger than 25% conducting an IPO in the years between 2001 and 2010.
According to Brooks (2011) the sample size could have an effect on the outcome
of the regression, and a smaller sample size will increase the chances of type one
and type two errors. We will therefore in addition test for Family controlled firm
with an ultimate ownership larger than 25%. This is in accordance to La Porta,
Lopez-de-Silanes and Shleifer (1998) arguments saying that family controlled
firms are firms where a family will have 20% or more of the shares, and definition
of 25% by NHO (2008). The table 1 reports that money left on the table are
larger in years with many IPOs, supporting the arguments by Ritter (1991) saying
money are left on the table in years with high numbers of IPOs are due to the over
optimism among investors, the offer price become higher than the real value.
Table 1 show overall that family controlled firms on average have a lower first
day return, however this number is saying very little on the economic impact on
the shareholders wealth loss. By comparing the money left on the table we see
that the amount is considerably lower when the firm is controlled by a family both
when the ownership is larger than 50% and 25%. This number should intuitively
be related to the level of underpricing, but it is interesting to see if family
controlled firms will follow the same pattern as non-family controlled firms and
relate the high underpricing in years with high frequencies to Loughran and Ritter
(2002) explanation on hot and cold issue.
Final Thesis GRA19003 02.09.2013
27
Tab
le 1
show
s the
des
crip
tive
stat
istic
s for
firm
s con
duct
ing
an IP
O o
n O
slo st
ock
exch
ange
eac
h ye
ar fr
om 2
001-
2010
. The
firs
t mai
n-co
lum
n sh
ows t
he d
escr
iptiv
e fo
r all
firm
s goi
ng p
ublic
. The
nex
t mai
n-co
lum
n sh
ows t
he d
escr
iptiv
e fo
r fam
ily o
wne
rshi
p la
rger
than
50%
and
the
last
mai
n-co
lum
n sh
ows t
he d
escr
iptiv
e fo
r fam
ily o
wne
rshi
p la
rger
than
25
%
Firs
t day
pro
fit is
her
e re
ferr
ed to
as t
he sa
me
as u
nder
pric
ing.
Ye
ar20
0120
0220
0320
0420
0520
0620
0720
0820
0920
10
Nu
mb
er
of
IPO
(N
ew
issu
e)
116
422
4632
5716
321
Un
de
rpri
ce M
ean
0,08
40,
017
-0,0
230,
015
0,08
20,
054
0,04
10,
013
No
val
ue
-0,0
47
Un
de
rpri
ce M
ed
ian
0,00
00,
000
-0,0
230,
000
0,02
50,
036
0,02
20,
000
-0,0
04
Mo
ne
y le
ft o
n t
able
7964
0198
,817
4792
993,
800
-348
1350
,000
4199
285,
850
9877
55,3
0389
4612
7,32
114
8772
91,1
56-1
5369
43,2
40N
o v
alu
e-2
1949
720,
797
Au
toco
rr0,
2918
Nu
mb
er
of
IPO
Fam
ily
con
tro
l >50
%1
20
34
35
20
2
Un
de
rpri
ce F
amil
y co
ntr
ol >
50%
Me
an-0
,013
0,02
2N
o v
alu
e-0
,061
0,03
80,
034
0,02
80,
111
No
val
ue
-0,0
84
Un
de
rpri
ce n
on
-fam
ily
con
tro
l0,
101
0,00
00,
047
-0,0
110,
053
0,04
90,
021
-0,0
04N
o v
alu
e-0
,114
Mo
ne
y le
ft o
n t
able
-135
0000
,000
4792
993,
800
No
val
ue
No
val
ue
4371
786,
667
9200
00,0
0011
1332
50,0
0012
8300
0,00
0N
o v
alu
e-1
2656
25,0
00
Au
toco
rr0,
1162
Nu
mb
er
of
IPO
Fam
ily
con
tro
l >25
%2
21
99
67
40
4
Un
de
rpri
ce F
amil
y co
ntr
ol >
25%
Me
an-0
,006
0,02
20,
047
-0,0
320,
060
0,01
00,
079
-0,0
74N
o v
alu
e-0
,093
Un
de
rpri
ce n
on
-Fa
mil
y co
ntr
oll
0,12
10,
000
No
val
ue
-0,0
130,
046
0,06
80,
034
0,04
2N
o v
alu
e-0
,125
Mo
ne
y le
ft o
n t
able
-135
0000
,000
4792
993,
800
1200
000,
000
8221
73,9
0082
1661
4,28
6-6
6500
0,00
051
5600
0,00
0-4
6620
0,89
3N
o v
alu
e-1
5986
76,2
50
Au
toco
rr-0
,011
6
Me
an o
f fa
mil
y o
wn
ers
hip
50%
& 2
5%-0
,009
0,02
2N
o v
alu
e-0
,047
0,04
90,
022
0,05
30,
019
No
val
ue
-0,0
89
Final Thesis GRA19003 02.09.2013
28
From table 1 we see that money left on table is more modest for family controlled
firms. However the level of money left on the table seems to be increasing with
the numbers of IPO and is consistent with Loughran and Ritter (2002) arguments
on the hot and cold market. Table 1 shows the autocorrelation on first day return
and there is a positive coefficient for both family controlled and non family
controlled firms. If all of the information is either private or public the
autocorrelation should be zero (Loughran and Ritter 2002). We can therefore
assume that some of the high first day return in some periods can be explained by
prospect theory. High demand and irrational investors drives the price up,
resulting in the value being higher than real value, which leads to wealth increase
for the issuer, even though there is money left on the table. This effect is even
larger for family controlled firms than others. In the years of hot issue both the
underpricing and money left on the table are higher than normal, compared to
other years. This indicates that families who are in control of firms are smart
issuer and recognizes the opportunity to take their firm public when the market is
overvalued.
0
10
20
30
40
50
60
-0.15000
-0.10000
-0.05000
0.00000
0.05000
0.10000
0.15000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Number of IPO
Number IPO family>25
Number IPO >50%
First day return
First day return family>25%
Mean family>50&25
First day return family >50%
Graph 1 shows the annual number of new issue on Oslo stock exchange in total and divided into family controlled firm with ownership larger than 25% and 50%. The first day return for the same categories are illustrated with lines.
Final Thesis GRA19003 02.09.2013
29
Graph 1 reports annually underpricing and show that family controlled firms tends
to have a lower first day return than non family controlled firm. This graph shows
some fluctuations in the three first years but seems to stabilize from 2004-2010.
This could be due to few observations in the first three years of both family
controlled firms and non family controlled firms.
Both family controlled firms larger than 50% and 25% have an average lower first
day return compared to non family controlled firms
Due to a low number of observations we have made an average first day return
based on both the variable family controlled firms larger than 50% and larger than
25%. This line seems to follow the line of >25% but does not show the same
effect. This could be an indicator of how the first day return on Family controlled
firms relates to the average. In Graph 1 we can see that high First day return is
followed by a high number of firms going public and a lower return leading to
fewer IPOs.
This graph support Ritter and Welch (2002) argument on behavioral explanations
and how issuers tend to see when the market are too overoptimistic and will
therefore take their firm public because of the high return in the aftermarket. It
also supports the theory on cascades saying investors will rely only on previous
investor’s action and not on their own valuation of firms. Ljungqvist (2007)
Table 2 shows the descriptive statistics of the variables. This result gives an
indication that family controlled firms are less underpriced than non-family
controlled firms and supports the hypothesis.
The mean and median are showing some differences when it comes to the result
of underpricing. The mean shows a lower short term underpricing for family
controlled firms while the median shows a slightly higher underpricing. These
differences could be caused by the number of IPOs around zero. It seems like
family controlled firms have a higher number of zero underpricing, however the
underpricing are lower for family controlled firms when there is a underpricing
higher than zero. The differences are due to the methods used to calculate mean
and median.
Final Thesis GRA19003 02.09.2013
30
Tab
le 2
show
s des
crip
tive
stat
istic
s of t
he v
aria
bles
use
d in
the
anal
ysis
, with
diff
eren
t ow
ners
hip
clas
sific
atio
ns.
UP=
Firs
t day
und
erpr
icin
g, F
am_5
0 =
dum
my
varia
ble
for f
amily
ow
ners
hip
larg
er th
an 5
0%,
Fam
_25=
dum
my
varia
ble
for f
amily
ow
ners
hip
larg
er th
an 2
5%,
Fam
_ult=
ulti
mat
e fa
mily
ow
ners
hip
mea
sure
d in
per
cent
, Ln_
age=
firm
age
, Ln_
offe
rsiz
e= g
ross
pro
ceed
s,
Fam
_ceo
= fa
mily
mem
ber a
cts a
s CEO
, Ln_
Uw
= un
derw
riter
rank
ing,
Ow
n_C
EO=
shar
es o
wne
d by
CEO
as t
he p
erce
nt o
f tot
al sh
ares
, mon
ey_t
able
= m
oney
left
on th
e ta
ble
is th
e nu
mbe
r of s
hare
s offe
red
times
und
erpr
ice,
Fam
_ow
n= fa
mily
ow
ners
hip
afte
r IPO
as t
he p
erce
nt o
f tot
al sh
ares
.
Me
an M
ed
ian
Max
imu
m M
inim
um
Std
. De
v. M
ean
Me
dia
n M
axim
um
Min
imu
m S
td. D
ev.
Var
iab
les
UP
1,16
%2,
79 %
16,0
0 %
-42,
00 %
12,5
5 %
4,53
%0,
00 %
68,0
1 %
-23,
00 %
13,8
6 %
Firm
age
10,9
05,
0037
,00
1,00
10,5
18,
345,
5034
,00
1,00
7,54
Pro
p_s
old
-44,
60 %
-46,
88 %
9,63
%-9
8,77
%30
,32
%-1
2,82
%-3
3,05
%34
0,25
%-1
00,0
0 %
76,5
8 %
Fam
_ow
n35
,56
%36
,32
%61
,70
%1,
24 %
19,1
2 %
15,6
0 %
13,6
3 %
39,2
3 %
0,86
%10
,43
%
UW
11,7
3 %
10,9
8 %
36,6
9 %
0,07
%9,
22 %
11,0
0 %
10,4
1 %
36,6
9 %
0,08
%7,
96 %
OFF
ERSI
ZE16
2 54
1 76
3
129
000
000
50
0 50
0 00
0
10 0
00 0
00
15
3 53
6 93
1
155
662
678
86
900
003
1 28
7 80
0 00
0
6 00
0 00
0
23
4 77
0 51
1
MO
NEY
_TA
BLE
5 14
5 33
4
766
500
32 0
00 0
00
-1
7 16
0 00
0
12 2
57 4
20
14
331
021
296
325
479
191
193
-33
432
480
77
251
547
Fam
_CEO
28,5
7 %
0,00
%10
0,00
%0,
00 %
46,2
9 %
18,3
3 %
0,00
%10
0,00
%0,
00 %
39,0
2 %
Me
an M
ed
ian
Max
imu
m M
inim
um
Std
. De
v. M
ean
Me
dia
n M
axim
um
Min
imu
m S
td. D
ev.
Var
iab
les
UP
1,62
%0,
00 %
38,8
9 %
-42,
00 %
12,9
6 %
5,73
%1,
78 %
68,0
1 %
-7,6
9 %
13,9
4 %
Firm
age
9,70
6,00
37,0
0
1,
00
8,
87
8,
05
5,
00
34
,00
1,00
7,88
Pro
p_s
old
-38,
54 %
-40,
29 %
36,0
0 %
-98,
77 %
30,9
0 %
1,04
%-2
3,70
%34
0,25
%-1
00,0
0 %
91,3
3 %
Fam
_ow
n28
,68
%27
,00
%61
,70
%1,
24 %
15,6
2 %
11,8
5 %
9,70
%39
,23
%0,
86 %
9,73
%
UW
10,4
0 %
8,90
%36
,69
%0,
07 %
9,03
%11
,91
%14
,03
%21
,80
%0,
14 %
7,29
%
OFF
ERSI
ZE12
1 19
2 69
6
80 9
50 0
02
50
0 50
0 00
0
6 00
0 00
0
127
050
439
19
8 45
1 22
3
102
500
000
1
287
800
000
14
000
000
275
568
974
MO
NEY
_TA
BLE
3 94
1 31
1
75 0
00
33
963
440
-17
160
000
11
092
614
19 8
07 5
33
1
655
500
47
9 19
1 19
3
-3
3 43
2 48
0
94 5
07 6
31
Fam
_CEO
34,8
8 %
0,00
%10
0,00
%0,
00 %
48,2
2 %
5,13
%0,
00 %
100,
00 %
0,00
%22
,35
%
Fam
ily
con
tro
l 50%
No
n-f
amil
y co
ntr
ol 5
0%
Fam
ily
con
tro
l 25%
No
n-f
amil
y co
ntr
ol 2
5%
Final Thesis GRA19003 02.09.2013
31
Further, we see that family controlled firms tend to be on average two and a half
years almost two years older for respectively family ownership larger than 50%
and 25%, than non-family controlled firms when they are conducting an IPO. This
result supports the hypothesis 2 that family controlled firms have a higher age
when conducting an IPO.
Families controlling over 50 percent of the shares in front of an IPO will on
average reduce their number of shares by 44.5 percent while families controlling
less than 50 percent will reduce their ownership by 13 percent. We find the same
result when investigating family control larger than 25%. This contradicts the
hypothesis that families taking their firm public seek to maintain control of their
firm. However, it is not clear if families with high ownership sell off a larger part
of their shares, for their own sake, or due to the listing requirements by Oslo
Stock Exchange.
However by looking at the descriptive statistic of the ultimate ownership after
IPO, we see that families controlling more than 50 percent pre IPO controls a
higher number of shares post IPO (35 %) while families controlling less than 50
percent holds on average 15 percent of the shares after the IPO. This support the
hypothesis that families want to maintain the control after they take the firm
public. These results are interesting and support the overall theory on corporate
governance presented by Chambers (2012)
We see that the percent of family controlled firms that processes the CEO position
is 28,57% and 34,88% for family ownership larger than 50% and 25%
respectively . This supports the Anderson and Reeb (2004) arguments about the
link between ownership and management. How a stronger ownership leads to a
closer collaboration between the management and owners and support hypothesis
4, about the lower agency cost in family controlled firms
An interesting aspect concerning the underwriter ranking is that family controlled
firms use underwriters with a lower ranking than non-family controlled firms.
This is surprisingly, and contradicts the assumptions of previous literature on how
underwriter ranking will affect the underpricing (Carter and Manaster 1991,
Megginson and Weiss 1991). We have argued that family controlled firms will
Final Thesis GRA19003 02.09.2013
32
have a lower underpricing compared to non-family controlled firms leading to the
assumption concerning the use of higher ranked underwriters.
Overall, the descriptive is more precise when investigating family ownership
larger than 25%. Together with the descriptive for family ownership larger than
50%, we see that most of our arguments are correlated with the literature
presented in the previous chapter.
The result from the descriptive statistics supports overall the hypothesis and
previous literature on the topic of IPO and family controlled firms. However, this
is only on a superficial level and we cannot base the result on mean and median,
and tells us nothing about how each variable affects the underpricing.
7 Methodology
Researchers like Daugherty and Jithendranathan (2012) and Ding and
Pukthuanthong-Le (2009) have shown that OLS is a sufficient tool and will be
efficient when investigating the connection between ownership structure and short
term underpricing. Nevertheless, we have to do several diagnostic tests and
control our variables and regression to see if our estimation fulfills the assumption
of OLS.
We set up an OLS regression to examine underpricing for our variables:
𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔𝑖 = Family dummy𝑖 + 𝐹𝑖𝑟𝑚 𝑎𝑔𝑒𝑖 + Offersize𝑖 +
Proportion of shares sold by controlling family𝑖 + Family member as CEO𝑖 +
𝑈𝑛𝑑𝑒𝑟𝑤𝑟𝑖𝑡𝑒𝑟 𝑟𝑎𝑛𝑘𝑖 + 𝑢𝑖
We have implemented all these tests in the different regressions and made
improvements to the model where needed.
Brooks (2011) explains how heteroscedasticity and autocorrelation can still cause
unbiased coefficient, but the estimate may not longer have the minimum variance
and the assumption of OLS will not hold. We have used a Whites test to test for
Final Thesis GRA19003 02.09.2013
33
presence of heteroscedasticity. The result are somewhat ambiguous, however they
are not any better when correcting for heteroscedasticity using white’s modified
standard error estimates.
The consequence of ignoring the presence of autocorrelation is similar to the
consequence of having heteroscedasticity and there is an uncertainty whether the
independent variables will have an effect on the dependent variable. High level of
positive autocorrelation will increase the probability of a type 1 error leading to an
incorrect rejection of a null hypothesis.
The Durbin-Watson test gives an indication of the presence of autocorrelation.
Our result shows a DW value close to 2, indicating a low level of autocorrelation.
In addition, we have tested for autocorrelation using the Breush-Godfrey test since
the DW has some limitations. This test is not showing signs of autocorrelation,
and we conclude that further improvements are not necessary.
While our model passes the previous mention assumption of OLS There are some
varying result regarding the assumption of normally distribution. The output
shows a high kurtosis and skewness to the right. This does not match the
assumption of the OLS and is supported by the Jarque-Bera test, that shows a
probability lower than 0,05 and we are therefore not able to reject the null
hypothesis of normality.
According to Brooks (2011) there is not obvious how to proceed if there is
evidence of non-normality. He argues that one could find a model that is better
fitted, but this could be demanding, and if the model has been well researched, it
could be best to continue the OLS. He also argues that there are often in financial
data some extreme residuals that causes major impact, and will be shown in the
tale, leading to higher kurtosis. By examine the residuals of the regression
(appendix 3) we see that there are some observations that could cause the outlier
and hence the skewed result. These outliers could be removed from the model to
improve the normality but we are concerned that removing outliers could lead to a
worse model due to the already low sample of observations. To improve the
model we have in addition removed the year of 2007 and 2008. We will discuss
this later in the thesis under the robustness test. The result from the normality test
is positive when removing the outliers from these years. But based on Brooks
(2011) arguments for not intervening, we choose to run the original regression
without removing outliers.
Final Thesis GRA19003 02.09.2013
34
To improve the normality we have also transferred several of the variables to a
natural logarithm. According to Brooks (2011) this will make the variables more
fit to be used in a linear regression.
To test for the presence of multicollinearity and to see the relationship between
the explanatory variables we have run a correlation matrix. According to Brooks
(2011) the model could lose precision if some of the variables are highly
correlated whit each other, and it is therefore important to detect and remove
highly correlated explanatory variables. This method could also detect if there is
presence of endogeneity. Variables which are correlated with the error term in the
regressions, causes a statistical error, called endogeneity. When endogeneity exist
in a regression, it implies that the coefficients are biased. By comparing the
correlation between the variables (appendix 4) we see that there is correlation
between Own_Ceo and Fam_Ceo. However, these variables are not used
simultaneously, but individually in different models. This result also indicate that
there is no need for a two stage OLS as opposed to other research on the topic,
like Daugherty and Jithendranathan (2012)
Our tests indicates for the most that OLS is sufficient, however there are some
evidence that OLS are not to be the best model for our regression. On the other
hand OLS has been showed to be the best model by many researchers when
testing variables affecting the short term underprice. We have mentioned earlier
that our model has a relatively low number of observations, and Brooks (2011)
argues that the result from x^2 test and F-test may be different in small samples
and this may affect the result in the diagnostic tests. Similar research has been
done abroad but with a much larger sample (Daugherty and Jithendranathan 2012,
Ding and Pukthuanthong-Le 2009)
We therefore conclude that OLS is the best method to use when investigating the
relationship between family controlled firms and underpricing.
Final Thesis GRA19003 02.09.2013
35
8 Regression analysis
8.1 Results hypothesis 1:
The first hypothesis we investigate is the main question in this thesis and will shed
light into whether or not a family controlled firm is less underpriced than other
firms.
The dummy variable Fam_50 which includes all firms with more than 50% family
ownership is negative and has the expected sign of the coefficient which is
consistent with hypothesis 1, but it is not significant for our sample. With 46
observations, and even fewer observations of family controlled firms with
ownership larger than 50%, it could be hard to get a significant sample.
Column two shows the Fam_25, and this is significant at a 90% level and with a
coefficient of -0,08 indicates that underpricing decreases when a firm has an
Family owner with more than 25% of the firm than firms with less than 25%.
While the ownership dummy at 50% was not significant in regression one, we see
that when setting a lower requirement of family control in the ownership dummy,
we get significant results and the same sign as the coefficient in regression one.
These results correspond to our previous arguments on the classification of family
controlled firms and how the line seems to be bigger between 25% than 50%.
To test this more thoroughly, we removed the dummy variable and replaced it
with family ownership without a dummy requirement in regression three. This
because we want to see how the ultimate ownership affect the underpricing when
conducting an IPO
Fam_ult, (row 3) ultimate ownership held by families is significant, almost at a
95% level and shows a negative coefficient (-0,05) This gives the result that a
higher degree of family ownership will lead to a lower underprice when going
public.
Final Thesis GRA19003 02.09.2013
36
1 2 3 4 5 6
Fam_50 -0,0545 -0,0563
(-1,21) (-1,24)
Fam_25 -0,0767* -0,0694
(-1,77) (-1,65)
Fam_Ult -0,0482* -0,0495
(-1,95) (-1,96)
Ln_Age -0,0470** -0,0473** -0,0465** -0,0471** -0,0505** -0,0514**
(-2,18) (-2,18) (-2,21) (-2,21) (-2,44) (-2,46)
Ln_Offersize 0,0357* 0,0355** 0,0294* 0,0279 0,3360* 0,0328*
(2,01) (2,02) (1,68) (1,60) (1,96) (1,93)
Fam_Ceo 0,0080 0,0384 0,018
(0,17) (0,80) (0,4)
Prop_Sold -0,0166 -0,0168 -0,0226 -0,0242 -0,0363 -0,0373
(-0,58) (-0,60) (-0,80) (-0,86) (-1,20) (-1,25)
Ln_UW 0,1556 0,1499 0,0609 0,0499 0,1033 0,0897
(0,70) (0,68) (0,27) (0,22) (0,48) (0,41)
Own_Ceo 0,0004 0,0009 0,0009
(0,22) (0,43) (0,43)
N 46 46 46 46 46 46
R^2 0,2423 0,2426 0,2724 0,2640 0,2833 0,2838
R^2 (adj) 0,1257 0,1261 0,1604 0,1508 0,1731 0,1736
DW 1,6775 1,6942 1,7517 1,7763 1,7449 1,7779
50% 25% Ulitmae ownership
Ownership requirement
Table 3 shows the regression output for the sample of 46 Norwegian firms from 2001-2010, and is the estimation output for hypothesis 1, 2, 3a, 3b and 4. The three main columns represents the ownership classifications for respectively 50%, 25% and ultimate ownership Sub- columns 1, 3, and 5 shows the output of the main regression, only with different ownership classifications, while sub- columns 2, 4, and 6 shows the output of the robustness test where variable Fam_Ceo is replaced with Fam_Ceo, and the different ownership classifications . Dependent variable: UP= First day underpricing Independent variable: Fam_50 = dummy variable for family ownership larger than 50%, Fam_25= dummy variable for family ownership larger than 25%, Fam_ult= ultimate family ownership measured in percent, Ln_age= firm age, Ln_offersize= gross proceeds, Fam_ceo= family member acts as CEO, Ln_Uw= underwriter ranking, Own_CEO= shares owned by CEO as the percent of total shares. 𝐶𝑜𝑙𝑢𝑚𝑛 1: 𝑈𝑃𝑖 = Fam_50𝑖 + 𝐿𝑛_𝐴𝑔𝑒𝑖+Ln_Offersize𝑖 + Prop_sold𝑖 + Fam_Ceo𝑖 + 𝑈𝑤𝑖 + 𝑢𝑖 𝐶𝑜𝑙𝑢𝑚𝑛 2: 𝑈𝑃𝑖 = Fam_50𝑖 + 𝐿𝑛_𝐴𝑔𝑒𝑖 + Ln_Offersize𝑖 + Prop_sold𝑖 + Own_Ceo𝑖 + 𝑈𝑤𝑖 + 𝑢𝑖 𝐶𝑜𝑙𝑢𝑚𝑛 3 ∶ 𝑈𝑃𝑖 = Fam_25𝑖 + 𝐿𝑛_𝐴𝑔𝑒𝑖 + Ln_Offersize𝑖 + Prop_sold𝑖 + Fam_Ceo𝑖 + 𝑈𝑤𝑖 + 𝑢𝑖 𝐶𝑜𝑙𝑢𝑚𝑛 4: 𝑈𝑃𝑖 = Fam_25𝑖 + 𝐿𝑛_𝐴𝑔𝑒𝑖 + Ln_Offersize𝑖 + Prop_sold𝑖 + Own_Ceo𝑖 + 𝑈𝑤𝑖 + 𝑢𝑖 𝐶𝑜𝑙𝑢𝑚𝑛 5: 𝑈𝑃𝑖 = 𝐹𝑎𝑚_𝑈𝑙𝑡𝑖 + 𝐿𝑛_𝐴𝑔𝑒𝑖 + Ln_Offersize𝑖 + Prop_sold𝑖 + Fam_Ceo𝑖 + 𝑈𝑤𝑖 + 𝑢𝑖 𝐶𝑜𝑙𝑢𝑚𝑛 6: 𝑈𝑃𝑖 = 𝐹𝑎𝑚_𝑈𝑙𝑡𝑖 + 𝐿𝑛_𝐴𝑔𝑒𝑖 + Ln_Offersize𝑖 + Prop_sold𝑖 + Own_Ceo𝑖 + 𝑈𝑤𝑖 + 𝑢𝑖 t-stat in ( )
* ** *** denote the significance at 10% 5% 1% respectively
Final Thesis GRA19003 02.09.2013
37
By comparing this result with the result from the descriptive we can draw the
connection between the spurious result of underpricing on family controlled firms
larger than 50% to a low sample. On the other side the result from the descriptive
and regression on family controlled firms larger than 25 percent is more
congruent. Significant coefficient of Fam_25 and a more unambiguous mean and
median on underpricing leads to a more clear result.
We can clearly see with all three regressions that the coefficients for ownership
structure are negative and have a negative effect on underpricing. These results
are consistent with our hypothesis, that family controlled firms are lower
underpriced.
From these three regressions we can clearly see that the family ownership variable
all have the same negative coefficient and with significance in column two and
three. In our descriptive, we also saw that the underpricing was lower in family
controlled firms, so we therefore state that hypothesis one is true. This result is
consistent with the result of Daugherty and Jithendranathan (2012), who finds that
family firms are less underpriced than non-family controlled firms, which in our
thesis is presented through Norwegian firms.
The result from the regression and the coefficient on the family variables are some
ambiguous and shows the difficulty of setting a line where a firm are to be
classified as a family controlled firm. Both from the regression and the descriptive
we see a clearer line between 25% than 50% ownership.
8.2 Result hypothesis 2: As expected we get the result that the variable Ln_Age have a negative coefficient
and are significant at a 95 % level for all six regressions. The age of the firm when
conducting an IPO is still significant when including the dummy at 50% (-
0,0470), 25% (-0,0465) and ultimate ownership (0,0505). A higher firm age when
going public will result in a lower first day return. This result corresponds to the
result presented by Daugherty and Jithendranathen (2012) and supports the overall
perception on how higher firm-age reduces the information asymmetry presented
by Ritter (1984), saying that for each year the firm has existed before conducting
an IPO the firm will possess more past data, making it easier to evaluate the firm.
Final Thesis GRA19003 02.09.2013
38
Why there is more underpricing in younger firms is explained by lack of past data,
and will lead to a higher difference in the offering price and market price. The
descriptive shows that the median and mean age of family controlled firms are
higher than non-family controlled firms, providing us evidence that family firms
are older when conducting an IPO as mentioned earlier. By comparing these two
results, we can suggest that family firms are less underpriced due to a more
mature age when going public, leading to a reduced information asymmetry. Ding
and Pukthuanthong-Le (2009) got the same result from their study on the Taiwan
market
In an IPO process valuation is the element of risk, since it is hard for the buyers to
know exactly the market price of an issue. Rock (1986) found that underpricing is
created by risk, such that higher risk of a firm will give higher underpricing. Since
the risk of a firm is decreased by higher age of the firm, we get results which
follow the principles of Rock (1986), making our hypothesis two true.
8.3 Result hypothesis 3a
In hypothesis 3a we wanted to test if the proportion of shares issued will be
posetively correlated with underpricing and if family controlled firms will issue
less than non-family controlled firms.
The result presented in table 3 show that offer size is positively correlated with
underpricing, and all three were significant at a minimum 90% level. With a
positive coefficient in all three regressions, we can therefore accept hypothesis 3a,
that proportion of shares issued will be positively correlated with underpricing.
Our hypothesis was influenced by Rock (1986) argumentation on asymmetric
information effect on underpricing and was based on Michaely and Shaw (1994)
who found results indicating that a higher offer size gives lower underpricing. A
positive and significant coefficient is consistent with hypothesis 3a and gives an
indication that the asymmetric information will have a huge impact on the
underpricing. A higher offer size could also follow Ritter and Welchs (2002) and
Brennan and Franks (1997) argumentation on allocation of shares and control,
indicate that issuers are willing to lower the price in an attempt to retain the
control of the firm. From table 2 we see that family controlled firms on average
have a higher percent of ownership after the IPO, which is consistent with
Final Thesis GRA19003 02.09.2013
39
Chambers (2012). These results seen in relation to family controlled firms having
on average a smaller offer size when conducting an IPO (table2), gives us
evidence to conclude that hypothesis 3 a is true.
8.4 Result Hypothesis 3b In addition, our hypothesis states that the controlling family wants to retain
control and thereby selling less of their shares under an IPO. In the descriptive,
we could not see any clear result that families in control of firms sold a lower
number of their shares. In fact they issued a higher proportion of their shares than
non family controlled firms.
From the result in table 3, we see that this is in consistent with the regression
where all three coefficient are not significant. With negative coefficients in all
three regressions we can state that the more of the shares the family keeps, the
lower underpricing it has when performing an IPO, giving the hypothesis support,
but not significant enough to reject the null hypothesis. Looking at the descriptive,
we can see clearly that families seek to maintain control after they conduct an
IPO, as mentioned earlier in the descriptive, while they still sell a bigger part of
their shares (table 2). The fact that proportion sold out is not significant could be
because the shares sold by family are on average at a very similar level. In
addition, the high degree of family ownership after the IPO has a higher signaling
effect than the proportion sold. The effect seems to be absent or small as long as
the family still owns a part of the firm after the IPO. One could argue along the
theory of asymmetric information (Rock 1986) and signaling theory in family
firms (Leland and Pyle (1976)) and ask the question why this not has an effect on
the underpricing. By looking at the descriptive, we can draw the conclusion that
there is a very low number of controlling families that reduce their ownership
entirely, and we might draw the conclusion that this effect will not be captured
since it is more or less absent. As explained the signaling-effect family ownership
has on IPO price and real value seems to be present regardless of proportion of
shares sold by the family.
This result does not support hypothesis 3b, but support the perception that
families has a higher incentive to retain control of the firm after going public.
Final Thesis GRA19003 02.09.2013
40
8.5 Result hypothesis 4:
In the last hypothesis, we wanted to see if family controlled firms with CEO will
reduce agency conflicts, resulting in lower underprice. From the regression output
(table3) we, see that all coefficients are positive, given that when the CEO also
owns a part of the firm, the underpricing is higher. However, this result is not
significant in any of the regressions and we cannot conclude that hypothesis 4 is
true. This contradicts the theory presented in the literature review. To test this
hypothesis more thoroughly, we have chosen to replace the variable Fam_Ceo
with Own_Ceo to see the connection between ultimate CEO ownership and the
underpricing. The result from this regression (column 2, 4 and 6) are similar to
previous regression (row 1, 3 and 5) and we find none of the coefficients to be
significant. In addition, we do not see any big changes in the other coefficients
and we cannot dismiss the null hypothesis.
From the descriptive, we do not get any evidence, supporting our hypothesis, but
there is clearly a link between family control and having the CEO position as
mentioned (table 1). We based our hypothesis upon Anderson and Reeb’s (2003)
and Arthurs et al (2008) research, which stated that the link between family
ownership and involvement from the family in the management could reduce
agency cost when the CEO position was held by a family founder. The
inconclusive result from both tests may be due to a low number of observations or
a smaller effect of agency cost on underpricing in the Norwegian market than
anticipated. According to research by Villalonga and Amit (2006) will the
generation controlling the firm affect the profitability of the firm, and this could
also be a decisive consideration when dealing with underpricing and agency cost.
However because of the data we cannot distinguish which generation that controls
the firm.
Based on the output presented in table 3 we must reject the hypothesis, and we
will conclude that the controlling family in the CEO position has no effect on
underpricing.
8.6 Result from control variable The result from the control variable is slightly surprising and contradicts previous
research on the topic. Based on research made by Carter and Manaster (1991),
Final Thesis GRA19003 02.09.2013
41
Megginson, and Weiss (1991) we had expected the underwriter ranking to have a
negative effect on underpricing. However, the coefficient of underwriter ranking
was not significant in any of the regressions (table 3). This contradicts empirical
investigations, saying that higher underwriter reputation is negative correlated
with underpricing. As explained in the descriptive, family controlled firms both
larger than 25 and 50 percent are using an underwriter with a lower rank
compared to non-family controlled firms (table 2). In addition, family controlled
firms are on average lower underpriced than non-family controlled firms (table 2).
To investigate this relationship we have separated the observations into groups of
family-controlled and non-family controlled firms and developed a simple
regression to capture the underwriter effect on underpricing. Table 4 presents the
result of the impact on underpricing by underwriter rank and the result from the
regression is surprisingly, and is showing opposite effect on the two different
groups.
We see that higher underwriter ranking lead to lower underprice for non-family
controlled firms with a coefficient of -0,06777 and -0,794151 for respectively 50
and 25 percent, while with greater underwriter ranking, family-controlled firms
receive higher underpricing. However, only the result for ownership larger than
25% is significant. Researchers have argued on how underwriters could cause
both high and low underprice and this outcome could shed light into Habib and
Ljungqvist (2001) arguments on how some owners have a higher incentive to
keep a lower underprice. Family controlled firms who tend to choose a lower
ranked underwriter and at the same time keep the underpricing at a lower level fits
Table 4 shows a simple regression to test the underwriter rankings effect on underpricing. The
output is separated in two showing the different effect of underwriter ranking on family controlled
firms and non-family controlled firms.
𝑈𝑃𝑖 = 𝑈𝑤𝑖 + 𝑢𝑖
Family controlled Non-family controlled Family controlled Non-family controlled
LN_UW 0.232447 -0.067777 0.475444* -0.794151**
N 16 46 33 29
R^2 0.073387 0.001058 0.102287 0.141054
R^2 (adj) 0.007200 -0.021645 0.073329 0.109242
DW 3.095931 1.207384 2.242288 1.329631
Ownership requirement
50 % 25 %
Final Thesis GRA19003 02.09.2013
42
well into this share-owner category. The different effect of underwriter rank in the
two groups could also support Arthurs et al (2008) arguments on how investment
banks seek to keep a better relationship with institutional investors. They argue
further that a venture capitalist will have a shorter time horizon and might have
built a stronger relationship with a investment bank both because of the profit and
because the time horizon makes it difficult to monitor the process.
9 Robustness test
Some of the result is not consistent with the hypothesis we presented and
contradicts the overall perception on the determinants on underpricing. With the
basis of these biases and the fairly modest number of observations, we have
therefore done a robustness test to see whether or not our results hold. Part of this
test is shown in table 3 where we added a substitute to the primary variables. The
variable Own_Ceo in addition to the different classification of family control.
These variables are showing similar results as the main variable and are
contributing to a more thoroughly investigated result.
Under the chapter Method, we argued how the volatility was larger pre and during
the financial crisis of 2007-2009 and we therefore want to exclude the years that
differ from the normal. By removing the year of 2007 and 2008 (none of the IPOs
in 2009 was included in the previous regression due to our requirement), we get a
result showing normality and gives similar outcome as the previous model
(appendix 5). However the dummy variable >50 is now negative and significant,
supporting hypothesis on family control and low underpricing. Even with a lower
number of observations this robustness test together with the main regression
gives us an indication that hypothesis one is true. If we disregard years with
abnormal volatility, family controlled firms tend to have a lower underprice than
non-family controlled firms.
10 What could be improved?
As explained the Norwegian stock market is small compared to other trade
markets and the size of observations could be too low to get an accurate outcome.
However, our robustness test and use of substitute variables and the fact that some
of the outcome is consistent with previous research indicate that the conclusion
Final Thesis GRA19003 02.09.2013
43
holds. If we are going to point on a weakness in the thesis that needs to be more
thoroughly tested it is the family variables. These numbers are based on annual
data and may deviate from the actual number at the time the IPO was conducted.
By using these numbers, we are not able to investigate if owners keep their shares
after the IPO have been conducted, or if they sell all/parts of their shares due to
higher prices in the aftermarket. A more thorough investigation of the CEO
position and which generation that are in control could lead to a more accurate
result, based on the theories by Villalonga and Amit (2006), saying that that CEO
position held by inheritors could be ruining the reduced agency cost created by
having the founder as CEO. By separating the CEO position in to different sub
groups we could investigate whether there is a difference having the CEO position
held by the founder or heirs, and we could on a more secure basis accept or
exclude the impact of reduced agency cost on the IPO underpricing in the
Norwegian market
11 Conclusion
This thesis has dealt with the theories and research on the topic of IPO and
underpricing and the mechanism that will have an effect on the short term return
when a firm goes public. Further, these theories are related to the corporate
governance in family controlled firms, trying to explain why there should be
differences between the underpricing in family controlled firms and non-family
controlled firms. The result from our investigation shows that there are differences
between the two groups of family control and how this affect the short term
underpricing. Family controlled firms tend to have a lower underpricing when
going public both for firms with family ownership larger than 25% and 50%.
However, the result seems to be more accurate when dealing with ownership
larger than 25%.
The number of issue and money left on table seems to follow the same cycles as
non-family controlled firms, and we can see that years with many IPOs are
followed with higher underpricing. We can therefor relate some of the
underpricing to hot and cold markets and the behavioral explanations of
underpricing.
Final Thesis GRA19003 02.09.2013
44
We find the variables related to the asymmetric information, age and the offer size
to have a great impact on the underpricing in family controlled firms. A higher
age will reduce the information asymmetry and lead to a lower underpricing,
while a higher offer size lead to a higher underpricing. Comparing these results to
the structure in family controlled firms, we see that these firms tend to have a
higher age and a lower offer size when conducting an IPO. Contrary we find the
variables related to theories on agency cost and management to have no impact on
the underpricing. Even though the CEO position in family controlled firms tend to
be held by one of the members of the controlling family. Our results show that
this has no effect on the underpricing.
One interesting finding is underwriters’ impact on the underpricing. Most theories
and research are showing a negative correlation between the underwriter rank and
the underpricing. However, we find an opposite effect on underpricing in the two
groups. While non-family controlled firms’ follow most theorists view that higher
underwriter rank leads to a lower underpricing, the underpricing in family
controlled firms will react opposite to the underwriter rank. The result from our
investigation shows that higher underwriter rank leads to a higher underpricing.
This is related to the findings that family controlled firms tends to choose a lower
ranked underwriter and is in accordance with our main findings that family
controlled firms have a lower IPO underprice.
Family controlled firms who go public have some characteristic differences from
other firms that goes public, and these differences have an impact on mostly the
asymmetric information between issuer and investor. The firm age and signaling
effect have in our tests proved to cause a lower underprice. Still there are some
areas that are not clear, and would be interesting to investigate more thoroughly,
especially to see whether the controlling family have a stronger incentive to keep
a low underprice, leading to more involvement in the process and higher effort to
keep the price closer to real value.
Final Thesis GRA19003 02.09.2013
45
12 References
Anderson, Ronald C. and David M. Reeb. 2003. “Founding-Family Ownership
and Firm Performance: Evidence from the S&P 500”. The Journal of
Finance 58(3): 1301-1328.
Arthurs, Jonathan D., Robert E. Hoskisson, Lowell W. Busenitz and Richard A.
Johnson. 2008. “MANAGERIAL AGENTS WATCHING OTHER
AGENTS: MULTIPLE AGENCY CONFLICTS REGARDING
UNDERPRICING IN IPO FIRMS”. Academy of Management Journal
51(2): 277-294.
Bancel, Frank and Usha R. Mittoo. 2009. “Why Do European Firms Go Public?”.
European Financial Management 15(4): 844-884.
Benveniste, Lawrence M. and Paul A. Spindt. 1989. “How investment bankers
determine the offer price and allocation of new issues”. Journal of
Financial Economics 24(2): 343-361.
Brennan, M.J. and J. Franks. 1997. “Underpricing, ownership and control in initial
public offerings of equity securities in the UK”. Journal of Financial
Economics 45: 391-413.
Bøhren, Øyvind. 2011. Eierne, styret og ledelsen. Fagbokforlaget.
Bøhren, Øyvind and Bernt Arne Ødegaard. 2002. ”Norsk eierskap: Særtrekk sære
trekk”. Fagbokforlaget.
Brooks, Chris. 2011. Introductory Econometrics for Finance. 2nd ed. Cambridge
University Press.
Carter, Richard B. and Steven Manaster. 1990. “Initial Public Offerings and
Underwriter Reputation”. Journal of Finance 45(4): 1045-1067.
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Carter, Richard B., Frederick H. Dark and Ajai K. Singh.1998. “Underwriter
Reputation, Initial Returns, and the Long-Run Performance of IPO
Stocks”. The Journal of Finance 53(1): 285-311.
Chambers, Andrew. 2012. Chambers’ Corporate Governance Handbook. 5th ed.
Bloomsbury Professional Ltd.
Chemmanur, Thomas J. and Paolo Fulghieri. 1999. “A Theory of the Going-
Public Decision”. The Review of Financial Studies 12(2): 249-279.
Daugherty, Mary.S. and Thadavillil. Jithendranathen. 2012. “Underpricing of
IPO’s of U.S. Family Controlled Businesses”. International Research
Journal of Finance and Economics 90:193-206
Ding, Hung-Bin and Kuntara Pukthuanthong-Le. 2009. “FAMILY FIRM IPO
PERFORMANCE AND MARKET SIGNALS”. Journal of Enterprising
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Grossman, Sanford. 1976. “ON THE EFFICIENCY OF COMPETITIVE STOCK
MARKETS WHERE TRADES HAVE DIVERSE INFORMATION”. The
Journal of Finance 31(2): 573-585.
Habib, Michel A. and Alexander P. Ljungqvist. 2001. “Underpricing and
Entrepreneurial Wealth Losses in IPOs: Theory and Evidence”. The
Review of Financial Studies 14(2): 433-458.
Hsieh, Jim, Evgeny Lyandresand Alexei Zhdanov. 2011. “A Theory of Merger-
Driven IPOs”. Journal of Financial and Quantitative Analysis 46(5): 1367-1405.
Ibbotsen, Roger.G. 1975. ” PRICE PERFORMANCE OF COMMON STOCK
NEW ISSUES”. Journal of Financial Economics 2(1975): 235-272.
La Porta, R., F. L´opez De Silanes, and A. Shleifer, 1998. “Corporate Ownership
Around the World,” Journal of Finance 54: 471-517.
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47
Leland, Hayne E. and David H. Pyle. 1977. “INFORMATIONAL
ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL
INTERMEDIATION”. The Journal of Finance 32(2): 371-387.
Litz, Reginald A. 2004. “The Family Business: Toward Definitional Clarity”.
Family Business Review 8(2): 71-81.
Ljungqvist, Alexander. 2007. “IPO Underpricing”. Handbook of Corporate
Finance: Empirical Corporate Finance, edited by Espen B. Eckbo, 375-
418. Elsevier/North-Holland.
Loughran, Tim. and Jay R. Ritter. 2002. “Why Don’t Issuers Get Upset About
Leaving Money on the Table in IPOs?” The Review of Financial Studies
15(2): 413-443.
Megginson, William L. and Kathleen A. Weiss. 1991. “Venture Capitalist
Certification in Initial Public Offerings”. The Journal of Finance 46(3): 879-903.
Michaely, Roni and Wayne H. Shaw. 1994. “The Pricing of Initial Public
Offerings: Tests of Adverse-Selection and Signaling Theories”. The
Review of Financial Studies 7(2): 279-319.
NHO. 2008. “NHO om familieeierskap”. NHO’s forum for familiebedrifter og
aktivt eierskap.
Padgett, Carol. 2012. Corporate Governance – theory and practice. PALGRAVE
MACMILLAN.
Ritter, Jay R. 1984. “The “Hot Issue” Market of 1980”. Journal of Business 57(2):
215-240.
Ritter, Jay R. 1991. “The Long-Run Performance of Initial Public Offerings”.
Journal of Finance 46(1): 3-27.
Final Thesis GRA19003 02.09.2013
48
Ritter, Jay.R. and Iwo Welch. 2002. “A Review of IPO Activity, Pricing,
and Allocations”. The Journal of Finance 57(4): 1795-1828
Rock, Kevin. 1986. “WHY NEW ISSUES ARE UNDERPRICED”. Journal of
Financial Economics 15: 187-212.
Svalland, Bjørn Morten and Lasse C. Vangstein. 2011. ”Family firms and
Diversification”. Praktisk Økonomi og Finans. 27(1).
Villalonga, Belen and Raphael Amit. 2006. “How do family ownership, control
and management affect firm value?”. Journal of Financial Economics 80: 385-
417.
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Review of Economic Studies 62: 425-448.
Final Thesis GRA19003 02.09.2013
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13 Appendix
13.1 Appendix 1 – IPO and closing price. Closing price are collected from Oslo Børs and Thomson Reuters Datastream, and
IPO prices are collected from equity feed from Oslo Børs, newsweb and netfond
which are all delivering official news from Oslo Børs.
Firm TICKER Year IPO Price Price Closing Underpricing
24SEVEN TECHNOLOGY GROUP ASA TFSO 2007 14,00 13,50 -0,04
ABILITY DRILLING ASA ADRL 2007 15,00 16,00 0,07
AGASTI HOLDING ASA ACTA 2001 10,00 10,00 0,00
AGILITY GROUP AS GGG 2005 18,00 23,50 0,31
AGR GROUP ASA AGR 2006 47,00 46,00 -0,02
AKER ASA AKER 2004 62,00 63,00 0,02
AKER SEAFOODS ASA AKS 2005 29,00 28,90 0,00
AKER SOLUTIONS ASA AKSO 2004 130,00 126,50 -0,03
AKVA GROUP ASA AKVA 2006 35,00 35,00 0,00
ALGETA ASA ALGETA 2007 47,00 44,00 -0,06
ALLIANSE AS ALL 2005 8,00 8,50 0,06
APL AS APL 2005 49,00 57,00 0,16
AQUA BIO TECHNOLOGY ASA ABT 2008 9,00 10,00 0,11
ARROW SEISMIC ASA ARROW 2007 70,00 70,00 0,00
AUSTEVOLL SEAFOOD ASA AUSS 2006 39,00 39,80 0,02
BADGER EXPLORER ASA BXPL 2007 32,00 33,90 0,06
BERGEN GROUP ASA BERGEN 2008 31,00 29,00 -0,06
BIOTEC PHARMACON ASA BIOTEC 2005 24,50 25,00 0,02
BIRDSTEP TECHNOLOGY ASA BIRD 2002 16,50 16,50 0,00
BORGESTAD INDUSTRIES ASA BIND 2008 46,00 46,00 0,00
BOUVET ASA BOUVET 2007 40,00 40,00 0,00
BRIDGE ENERGY ASA BRIDGE 2010 20,00 17,70 -0,12
BW GAS AS GAS 2005 82,00 77,50 -0,05
BWG HOMES ASA BWG 2006 33,00 36,80 0,12
CATCH COMMUNICATION AS CATCH 2004 20,00 19,90 -0,01
CECON ASA CECON 2007 15,00 15,00 0,00
CELLCURA ASA CELL 2010 5,00 3,85 -0,23
CERMAQ ASA CEQ 2005 44,00 44,10 0,00
CLAVIS PHARMA ASA CLAVIS 2006 45,50 46,60 0,02
CODFARMERS ASA COD 2006 26,00 25,00 -0,04
CONSEPTOR AS CNS 2004 11,50 11,40 -0,01
COSL DRILLING EUROPE AS AWO 2005 22,00 22,00 0,00
DEEP SEA SUPPLY AS DESS 2005 11,50 11,90 0,03
DEEPOCEAN AS DEEP 2005 17,00 16,60 -0,02
DET NORSKE OLJESELSKAP ASA DETNOR 2006 60,00 64,50 0,08
DET NORSKE OLJESELSKAP ASA AKX 2007 56,00 56,00 0,00
DOF SUBSEA AS DOFSUB 2005 27,00 29,50 0,09
DOLPHIN GROUP ASA DOLP 2006 17,50 20,40 0,17
DOMSTEIN ASA DOM 2001 26,00 26,00 0,00
EASTERN DRILLING AS EDRILL 2005 64,00 70,00 0,09
EIDESVIK OFFSHORE ASA EIOF 2005 45,00 50,00 0,11
EITZEN CHEMICAL ASA ECHEM 2006 28,00 28,50 0,02
ELECTROMAGNETIC GEOSERVICES ASA EMGS 2007 135,00 145,50 0,08
EQOLOGY ASA SHINE 2010 2,20 2,00 -0,09
ETMAN INTERNATIONAL ASA ETMA 2007 3,50 3,50 0,00
FAKTOR EIENDOM ASA FAKTOR 2006 35,00 33,80 -0,03
FARA ASA FARA 2005 1,35 2,01 0,49
FEDAIA AS SPITS 2006 16,00 16,10 0,01
FORNEBU UTVIKLING AS SPDE 2007 37,50 37,50 0,00
FRED. OLSEN PRODUCTION ASA FOP 2007 26,00 24,80 -0,05
GJENSIDIGE FORSIKRING ASA GJF 2010 59,00 58,75 0,00
GJENSIDIGE NOR ASA GNO 2002 241,50 247,50 0,02
GRIEG SEAFOOD ASA GSF 2007 23,00 23,50 0,02
HAVILA SHIPPING ASA HAVI 2005 40,00 41,00 0,03
IDEX ASA IDEX 2010 1,20 1,23 0,03
IMAREX ASA IMAREX 2005 81,00 103,00 0,27
INFRATEK ASA INFRA 2007 18,00 17,60 -0,02
INTELECOM GROUP AS CON 2001 12,00 12,00 0,00
INTEX RESOURCES ASA ITX 2006 12,00 11,65 -0,03
JASON SHIPPING ASA CECO 2004 35,00 35,00 0,00
KLEPP SPAREBANK KLEG 2007 110,00 123,50 0,12
KONGSBERG AUTOMOTIVE HOLDING ASA KOA 2005 46,00 47,50 0,03
Final Thesis GRA19003 02.09.2013
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Firm TICKER Year IPO Price Price Closing Underpricing
LERØY SEAFOOD GROUP ASA LSG 2002 32,00 32,00 0,00
MAMUT AS MAMUT 2004 7,00 6,80 -0,03
MARINE FARMS AS MAFA 2006 14,00 13,80 -0,01
MEDISTIM ASA MEDI 2004 9,50 10,30 0,08
MICROSOFT DEVELOPMENT CENTER NORWAY AS FAST 2001 13,00 12,00 -0,08
MORPOL ASA MORPOL 2010 22,00 19,70 -0,10
NATTOPHARMA ASA NATTO 2008 12,00 9,93 -0,17
NEAS AS NEAS 2007 33,00 32,00 -0,03
NEMI FORSIKRING AS NEMI 2005 28,00 29,30 0,05
NETCONNECT ASA NETCO 2010 3,20 2,66 -0,17
NEXTGENTEL HOLDING AS NEXT 2003 25,00 22,70 -0,09
NORDA ASA NORD 2005 10,00 9,90 -0,01
NORGANI HOTELS AS NORGAN 2005 56,00 56,00 0,00
NORSTAT AS MRG 2005 11,00 10,50 -0,05
NORTH ENERGY ASA NORTH 2010 26,50 26,80 0,01
NORWAY PELAGIC ASA NPEL 2008 40,00 41,00 0,03
NORWEGIAN AIR SHUTTLE ASA NAS 2003 32,00 33,50 0,05
NORWEGIAN ENERGY COMPANY ASA NOR 2007 33,00 35,00 0,06
NORWEGIAN PROPERTY ASA NPRO 2006 53,50 57,75 0,08
ODIM AS OHI 2001 40,00 39,50 -0,01
ODIM HOLDING AS ODIM 2005 30,00 31,50 0,05
OFFSHORE HEAVY TRANSPORT AS OHL 2007 36,00 50,00 0,39
OSLO AREAL AS OSLO 2005 53,00 54,00 0,02
PAN PELAGIC ASA PEL 2001 13,69 23,00 0,68
PANORO ENERGY ASA PEN 2010 12,60 9,30 -0,26
PCI BIOTECH HOLDING ASA PCIB 2008 20,00 18,00 -0,10
PETROJACK ASA JACK 2005 9,00 9,15 0,02
PETROMENA ASA PMENA 2007 15,00 15,90 0,06
POWEL AS POWEL 2005 15,00 15,00 0,00
PROMENS GROUP AS POLI 2005 21,50 21,20 -0,01
PRONOVA BIOPHARMA ASA PRON 2007 23,00 23,80 0,03
PROTECTOR FORSIKRING ASA PROTCT 2007 14,00 15,00 0,07
Q-FREE ASA QFR 2002 15,70 16,40 0,04
REM OFFSHORE ASA REM 2007 40,00 43,50 0,09
RENEWABLE ENERGY CORPORATION ASA REC 2006 95,00 117,00 0,23
REPANT ASA REPANT 2007 15,20 16,60 0,09
RESERVOIR EXPLORATION TECHNOLOGY ASA RXT 2006 49,00 52,50 0,07
RESID INVEST AS SCAN 2007 40,00 42,50 0,06
SAGA TANKERS ASA SAGA 2010 12,00 13,00 0,08
SALMAR ASA SALM 2007 36,00 39,00 0,08
SCAN GEOPHYSICAL ASA SCANG 2007 28,00 27,50 -0,02
SEVAN MARINE ASA SEVAN 2004 8,50 9,80 0,15
SPAREBANK 1 NØTTERØY - TØNSBERG NTSG 2007 110,00 115,50 0,05
SPAREBANK 1 ØSTFOLD AKERSHUS RVSB 2005 110,00 130,00 0,18
STATOIL ASA STL 2001 69,00 69,00 0,00
STATOIL FUEL & RETAIL AS SFR 2010 39,00 39,00 0,00
STREAM INVEST AS BJORGE 2004 7,00 7,00 0,00
STX EUROPE AS STXEUR 2004 100,00 98,00 -0,02
SØLVTRANS HOLDING ASA STRANS 2010 25,00 25,00 0,00
TECO MARITIME GROUP AS TECO 2004 10,00 5,80 -0,42
TELIO HOLDING ASA TELIO 2006 30,00 30,00 0,00
THIN FILM ELECTRONICS ASA THIN 2008 10,00 12,90 0,29
TRANSOCEAN NORWAY DRILLING AS AKD 2005 36,85 39,20 0,06
TRIBONA ASA NLPR 2007 56,50 57,50 0,02
TROLLTECH AS TROLL 2006 16,00 17,50 0,09
UNISON FORSIKRING AS UNISON 2005 30,00 29,80 -0,01
VISMA HOSTING HOLDING AS ACTIVE 2004 6,00 5,85 -0,03
WEGA MINING AS WEMI 2007 5,00 5,80 0,16
WILH. WILHELMSEN HOLDING ASA WWASA 2010 24,20 22,90 -0,05
WILSON ASA WILS 2005 19,50 20,10 0,03
WINTERSHALL NORGE AS WNOR 2005 42,00 44,00 0,05
YARA INTERNATIONAL ASA YAR 2004 41,00 51,00 0,24
Final Thesis GRA19003 02.09.2013
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13.2 Appendix 2: Underwriter rank
Manager 2001-2004 2005-2007 2008-2010
Fondsfinans 0,0057 0,0011 0,0029
Cazenove 0,0057 0,0000 0,0000
First Securities 0,0210 0,0769 0,0080
Pareto Securities 0,0514 0,1410 0,2284
DnB Markets 0,2440 0,1188 0,0000
Morgan Stanley Dean Witter 0,2141 0,0000 0,0000
ABG Sundal Collier 0,0215 0,2273 0,0876
Enskilda 0,0561 0,1649 0,0332
Handelsbanken Capital Markets 0,0048 0,0014 0,0000
DnB NOR Markets 0,0000 0,1188 0,0000
Goldman Sachs 0,0150 0,0000 0,1234
UBS Investment Bank 0,2262 0,0456 0,0000
Carnegie 0,0228 0,1468 0,0353
Alfred Berg SE 0,0000 0,0012 0,0000
Oslo Branch 0,0000 0,0012 0,0000
Terra 0,0000 0,0164 0,0008
Fearnley Fonds 0,0000 0,0180 0,0000
Nordea 0,0000 0,0159 0,0592
CAR 0,0000 0,0032 0,0009
Leman Brothers 0,0000 0,0163 0,0000
Glitnir Securities 0,0000 0,0039 0,0019
Orion Securties 0,0000 0,0000 0,0046
Arcitc Securities 0,0000 0,0000 0,0132
BDO 0,0000 0,0000 0,0007
Selmer 0,0000 0,0000 0,0268
Bofa Merill Lynch 0,0000 0,0000 0,1772
Citigroup 0,0000 0,0000 0,0539
Argo Securities 0,0000 0,0000 0,0007
RS Platou Markets 0,0000 0,0000 0,0049
Periode
Underwriter rank
Final Thesis GRA19003 02.09.2013
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13.3 Appendix 3: Residuals
13.4 Appendix 4: Correlation matrix
-.2
.0
.2
.4
.6
-.4
-.2
.0
.2
.4
.6
.8
5 10 15 20 25 30 35 40 45
Residual Actual Fitted
Variables Ln_Age Ln_Offersize Own_Ceo Ln_Uw Prop_Sold Fam_Ceo Fam_Ult
Ln_Age 1
Ln_Offersize 0,0198 1
Own_Ceo 0,1604 0,0287 1
Ln_Uw 0,1235 0,1481 0,0769 1
Prop_Sold 0,1191 -0,2505 -0,177 0,0446 1
Fam_Ceo 0,0507 -0,0987 0,4987 -0,0896 -0,2072 1
Fam_Ult -0,0458 0,0996 0,2572 -0,1249 -0,48 0,1961 1
Correlation Matrix
Final Thesis GRA19003 02.09.2013
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13.5 Appendix5: Robusteness test
50% 25% Ulitmae ownership
1 3 5
Fam_50 -0.1148*
(-1,85)
Fam_25 -0.0995*
(-1.72)
Fam_Ult -0.0704*
(-2.28)
Ln_Age -0.0683** -0.0694** -0.0762**
(-2,33) (-2,35) (-2.74)
Ln_Offersize 0.0706** 0.0588** 0.0660**
(2,79) (1,68) (2.74)
Fam_Ceo -0.0017 0,0384 0.0166
(0,03) (0,80) (0.29)
Prop_Sold -0.0144 -0.021787 -0.0474
(-0,58) (-0,60) (-1.25)
Ln_UW 0.5730* 0.4039 0.4687
(1,80) (1,28) (1.55)
Own_Ceo
N 29 29 29
R^2 0.4700 0.4602 0.505150
R^2 (adj) 0.3255 0.3129 0.370191
DW 1.7612 1.663719 1.795528
Ownership requirement
Final Thesis GRA19003 02.09.2013
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13.6 Appendix 6: Preliminary thesis ID number/name: Audun Fagerstrøm Skattum 0829182
Mats Erik Strand 0858077
BI Norwegian Business School –
Preliminary Thesis Report
- IPO Underpricing and family controlled firms -
Hand-in date: 15.01.2013
Campus: BI Oslo
Examination code and name:
13.6.1.1 GRA 1902 Preliminary Report
Supervisor: Siv J. Staubo
Programme:
Master of Science in Business and Economics, major in Finance
Final Thesis GRA19003 02.09.2013
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Content
Introduction 56
Literature review 57
Methodology 62
Data 64
Further progression 64
Temporarily time schedule 65
References 44
Final Thesis GRA19003 02.09.2013
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Introduction
In this thesis we are investigating the relationship between the ownership structure
and the underpricing related to initial public offering in the Norwegian market,
more specific: the difference between family firms and non-family firms. We will
look at the different factors that can affect the underpricing when conducting an
IPO and correlate this to the structure of companies controlled by families.
Underpricing in an initial public offering is a well-known phenomenon and has
been a subject for many research papers.
The underpricing can be seen as the percentage difference between the price
offered by the issuer and the price at the end of the first trading day (Ljungqvist
2007). As early as 1975 Roger G. Ibbotsen found evidence of underpricing in
initial public offerings, but could not explain why it occurred.
“Strangely enough, we have not solved the mystery of the empirically observed
underpriced new issue offerings.” (Ibbotsen 1975)
Ritter (1984) and Rock (1986) among others developed theories of why and how
underpricing occur, leading to further research trying to explain how the
ownership structure in firms affect the offer price in an IPO process.
Previous research is showing that ownership structure is significant when valuing
a firm and the impact on the profit earned by investors the first trading day. But
there are little research on the topic of family controlled firms and the valuation
when they are conducting an IPO. In spite of family controlled firms is highly
important in the world economy and counts for 37 percent of fortune 500 firms
(Padgett 2012).
Researchers have in recent years focused on the ownership structure in a family
controlled firm and how it affects the long term performance.
Exploring the IPO performance in a family controlled firm can give investors
important insights on how to evaluate different investment objects.
In this thesis we will focus on how the ownership structure will affect information asymmetry and agency conflict between owners, management and underwriter. We will also focus on theories regarding the owners desire to maintain control over the firm.
Final Thesis GRA19003 02.09.2013
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Literature review
The phenomena of short-term underpricing in an IPO process is a well
documented subject and has been a topic in research for decades.
In the article “A review of IPO Activity, pricing, and Allocations”, Ritter and
Welch (2002) explain the plausible causes of short-run underpricing. They focus
on theories based on asymmetric and symmetric information, and theories based
on allocation of shares.
The theory of asymmetric information has been a popular theory among
researchers and was first explained by Grossman (1976). He argued that the
superior information will be showed through the equilibrium price.
The issuer is more informed than the investor and tries to distinguish from one
another other by signaling either high or low quality. High quality issuers are
selling at a lower price and try to recap the loss in the future. The investors who
want to pay a high price will require something in return to show their willingness
and the issuer will present a “gift on the table” in form of a lower price (Ritter and
Welch 2002). This theory is supported by Benveniste and Spindt (1989) and their
model of information acquisition saying an investor must be rewarded to reveal
their true demand during a book building period.
Leland and Pyle (1976) explained that an entrepreneur has more information
about the expected future cash flow and is signaling high quality by investing in
the project.
Another approach is to assume the investors are more informed than the issuers,
for example about the market demand. Assuming investors are equally informed
could explain why they buy at a lower price since they all want to make profit and
will request those issues that are valued at a significant lower level relative to real
value, but according to Ritter and Welch (2002) this could not explain the
phenomena of an overpriced IPO.
Rock (1986) show on the other hand that underpricing is a result of differentially
informed investors. The issuer and the underwriter possess more information
about the firms’ performance in the future than each investor individually, but will
have less knowledge than all investors together. Whereas uninformed investors
tend to bid randomly, informed investors only bid on favorable priced IPO.
Final Thesis GRA19003 02.09.2013
58
However there are few informed investors in the market and the issuing firm must set the price to a lower level to be sure that uniformed investors will buy and the issued shares will be fully subscribed. Setting the price lower will increase the demand from uninformed investors, create oversubscription and the need for rationing occurs. The demand from uninformed investors will increase to the point where all subscriptions are made by uninformed investors. At this point a lower price will reduce the probability to get an allocation leading to uninformed investors will withdraw. This theory is according to Ljungqvist (2007) similar to the theory of winners curse. The uninformed investors will on average have abnormal return equal to zero
Loughran and Ritter (2002) explain the phenomena of underpricing as the indirect
cost of having the underwriter. The issuer puts money on the table instead of
bigger fees to the underwriter. Their survey showed that IPOs with high
underpricing often had a lower initially valuation, but are priced higher as a result
of high demand for the IPO. The investors will be less critical to high
underpricing since their initial value has increased.
But Ritter and Welch (2002) are unsure how this value is divided between the
issuer, underwriter and the investors.
Theories on symmetric information are often based on the issuers’ fear of
litigation. With a higher price the probability that the share is overpriced increases
and the issuer will sell their shares at a lower price to avoid lawsuit from outside
shareholders in the future (Ritter and Welch 2002). But this will according to
Ljungqvist (2007) be a second-order driver for underpricing.
Even though asymmetric information and symmetric information has been a
popular theory among researchers, Ritter and Welch (2002) means that these
theories do not count for all underpricing.
They argue that underpricing can be explained by the agency conflict between the
issuer and the underwriter, the share allocation on one side, and the behavioral
explanation on the other side.
One interesting question is “How do investors decide in which issues to request
IPO allocations, and how heavily influenced is this by perceptions of what others
are going to do?” (Ritter and Welch 2002).
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Arthur et al (2008) describes the relationship between owner managers,
underwriter and venture capitalists and how there exist a multiple agency conflict
between the parties.
The management together with the underwriter will determine the issue price, but
may have different incentives for the price level and allocation of shares.
The management may use the IPO as a mean to maximize own utility level on the
expense of future shareholders and non-managing shareholders. (Ljungqvist 2007)
Also the connection between underwriters and investors is questioned. Arthur et al
(2008) argue that financial banks are better off having a long term relationship
with the institutional investors and underpricing is a mean to maintain such a good
reputation. They will also benefit from being responsible for allocation decisions.
The underwriters will have different incentives than the managers and company
owners that have hired them.
However Carter, Dark and Singh (1998) and Michaely and Shaw (1994) have
done research on the connection between underwriters reputation and
underpricing. They find evidence that high underwriter reputation is associated
with lower short-term underpricing.
Brennan and Franks (1997) find evidence that underpriced IPO tend to be
oversubscribed. They argue that underpricing gives the issuer the opportunity to
discriminate the allocation of shares and often in favor of small applicants to
prevent the allocation of large blocks and prevent new large shareholders, giving
the issuer the opportunity to maintain control of the firm.
However Habib and Ljungqvist (2001) advance another explanation and argue
that some IPOs are less underpriced because the owners have strong incentives to
keep a high price level. Owners who sell a big proportion of their shares will have
incentive to put a lot effort and money to avoid high underpricing, while owners
issuing a smaller proportion will care less about the underpricing.
There are several differences between a family controlled firm both in the
structure of ownership and their motives to conduct an IPO.
Ritter and Welch (2002) describe the reasons why a firm wants to go public by the
motive to raise capital and the desire to trade at a public market place. Mainly a
Final Thesis GRA19003 02.09.2013
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firm conducts an IPO so they can raise capital, to be able to invest in positive
NPV projects, or to satisfy the owners need for capital. In a family firm some
family members sell parts of their shares for personal reasons, while in non-family
firms owners can use the situation to get a more diversified portfolio. Ritter and
Welch (2002) also look at different theories in the life-cycles of the firm and
market-timing. When a firm gets to a certain stage in its life, it could be optimal to
go public for example to expand. Publicity and also the advantage of being the
first in its industry are also vital reasons.
By going public the owners sell a part of the company to new shareholders, which
could have been done by selling in the private market. Selling shares privately to
many new shareholders would make the owners able to negotiate the price and
then receive a higher price for their stocks. However Chemmanur and Fulghieri
(1999) argues that this would not be efficient since the evaluation cost would be
too high compared to the information cost of going public, and then making the
stock price lower, compared to an IPO.
Zingales (1995) points out that the initial owner could use the IPO to be able to
restructure his position in the firm, and also being able to sell out the proceeds he
wants to maximize. Many entrepreneurs seizes this opportunity to “collect the
prize” of their work and sells the company.
However Litz (2004) explains the importance to distinguish between family firm
and entrepreneurs and refers to later research in entrepreneurship, showing the
entrepreneur to be different in the management from the organization in family
firms.
The key difference between a family controlled firm and a non-family controlled
firm is the separation of control between management and owners. In a family
controlled firm, family members will have active participation as both owners and
in the management team (Chambers. 2012).
Anderson and Reeb (2003) argues that a family firm is separated from a non-
family firm by the amount of shares the founding family represents and whether
they are to be found in the board of the firm. However it is not definite how large
share of the company the family has to possess. In their paper they show an
example where the controlling family had as little as 2% of the shares, and still
were the majority owner.
Final Thesis GRA19003 02.09.2013
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The amount of management which also owns a part of the firm is greater than
non-family controlled firms. If the managers also have shares in the company they
will carry part of the risk when conducting an IPO. Ljungqvist (2007) argue that
the agency cost will diminish when the ownership is so large that it will outweigh
the private benefits. The agency problem between owner and underwriter can also
be reduced when both management and owners will have same incentive for the
price level.
Anderson and Reeb (2003) present another advantage of having owners as
managers. And explain why family firms have higher profitability then non-
family firms, because the CEO position is held by one of the family members who
understand the business. They interpreted their results such as that the presence of
a family in the board and controlling the firm, makes agency problems less and
family firms equal or even better in performance than non-family firms.
According to Chambers (2012) this success is based on the family business ability
of long-term thinking. The family’s wealth depends on the value of the firm, and
the strategy for the family is to take board decisions, making sure the continuance
of the firm through generations (Litz 2004). This could benefit in a more certain
valuation of the firm, leading to less information asymmetry.
When a family firm requires capital and this is done trough an IPO the founder find
it hard to adjust to a partial ownership. To retain a majority of shares within the
family the proportion of shares issued and the allocation of shares have to be
carefully designed (Chambers 2012).
Daugherty and Jithendranathan (2012) found that family firms is less underpriced
then non-family firms in the US market between 1996 and 2004. They explain the
difference by different ownership structure and argue that it is the effectiveness of
managers in the family firms who achieve less underpricing. However Ding and
Pukthuanthong-Le (2009) found evidence of lower underprice when family firm
was managed by an outsider as CEO. It is clear that the ownership structure will
have various impacts on the underpricing in different markets
Final Thesis GRA19003 02.09.2013
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Methodology
Our hypotheses are based on the theories and empirical work exploited in the
literature review. The main question is to see if there is a significant difference in
the short-term underpricing between family controlled firm and non family
controlled firm. Further the theory shows three directions where the ownership
structure most likely will have an effect on the underpricing of a family controlled
firm, and the study will be based on the theory of information asymmetry, agency
problem and the desire for a family to maintain control.
Hypothesis 1: Family controlled firms are less underpriced than non family
controlled firms.
To test hypothesis 1 we first have to determine which firm is a family firm and
which is not. We will first set the family variable up as a dummy variable, such
that it is equal to 1 for family firm and 0 for non-family firms. To test hypothesis
1 we do the following regression OLS:
Underpricingi = 𝜷𝟎 + 𝜷𝟏 * Familyi + εi
Hypothesis 2: Higher age will result in lower underpricing.
As shown in the previous chapter the information asymmetry will be reduced by
the approach of long-term decision making. When conducting an IPO the
information and valuation process is costly. Past data are used when evaluating
the firms total value, and less past data could make the evaluation harder (Ritter
1984). This means that the age of the firm will affect the underpricing of the
company.
Age of the firm when conducting an initial public offering has been in several
studies used to describe how “established” the firm is. Daugherty and
Jithendranathen (2012) and Ding and Pukthuanthong-Le (2009) has found in their
two separate markets that the older the firm is, the less underpricing it occurs. We
also get from Rock (1986) that risk is related to underpricing, in such term that
underpricing increase with higher risk of a firm.
Final Thesis GRA19003 02.09.2013
63
Hypothesis 3: Proportion of shares issued will affect underpricing.
In an initial public offering it differ a lot of how many percent of their shares the
issuing firm offer to the public. Techniques like issue fewer shares and use
underpricing as a tool to control the allocation of shares, gives a family the
opportunity to restructure and maintain the control of the firm. If the firm issues
less it could be a sign that they believe in the future of the firm and want to
maintain control. Habib and Ljungqvist (2001) find that proportion of shares
issued is negatively correlated with underpricing when conducting an IPO.
Whether or not this is consistent whit an IPO in a family controlled firm remains
to be observed. The family wants to maximize their value while they want at the
same time to maintain control.
Hypothesis 4: Higher proportion of family members in the management will
reduce agency conflicts, resulting in lower underprice.
In this hypothesis we will test the relationship between underpricing and the
amount of family involvement in the management. If involvement from family
ownership occurs in a firm, Anderson and Reeb (2003) argue that it is likely to
decreases agency cost. They point out that when the CEO position is held by
either a family founder or a “hired-hand”, the gain of this is the greatest.
We set up an OLS regression to examine underpricing for our variables:
Underpricingi = 𝜷𝟎 + 𝜷𝟏*Age of firmi + 𝜷𝟐* IPO volumei + 𝜷𝟑 * Amount of
fam. Ownership after IPOi + 𝜷𝟒 * Amount of fam. members in managementi
+ 𝜷𝟓*Underwriter rankingi + εi
Defining our variables:
Age - Age of the company when they conducted the IPO. This variable will be the
number of years between the firm was founded and the date of IPO.
IPO volume - Percentage issued to the public of total capital.
Amount of family ownership after IPO – The percent of shares held by the
controlling family after the IPO.
Amount of family members in the management – The number of family members
in the management team when conducting the IPO.
Final Thesis GRA19003 02.09.2013
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We will use underwriter ranking as control variable in regression. Underwriter
ranking is not data measurable precisely, so we have to make a proxy for the
ranking. We will use the underwriter’s total capital to measure ranking as a proxy
of this, assuming that firm which gets bigger IPO deals is more prestigious.
Michealy and Shaw (1994) used this as their proxy, and found high correlation
between reputation and the size of the IPO. By measuring if the underwriter
ranking has any effect on the IPO underpricing, we want to see if the firm’s
choice of underwriter is different when having a different ownership structure.
Data
We will collect our data from the Norwegian market on the 207 firms conducting
an IPO on Oslo Stock Exchange from 2002 to 2010. Our first problem will be to
examine which firms are in the definition of family firm. By doing this we will
use information made public by the firm in prospectuses before the initial public
offering. It is important to get a representative selection of data to get significant
results. Because of the size of the Norwegian market, our definition of family
firms can be modified after collecting and investigating the data.
The data involving the IPO day, issue price and the closing price will be found on
Datastream. BI also has a database called CCGR where we will collect data
regarding the age, board members, management team and family data.
Further progression
This thesis will require a high work effort and it is important for us and our
supervisor that we maintain our deadlines. After the preliminary report we will
focus on data collection, sorting and interpretation.
When we receive the feedback on the preliminary it is important to improve these
points with regard to the presentation.
Final Thesis GRA19003 02.09.2013
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Temporarily time schedule
1.-15. February – Most of the data which we will use have to be collected.
1. March – Complete our data analysis.
15. April – Roughly completed the interpretation of the data analysis.
15. June – Send the finished thesis to last guidance from supervisor.
1. September – Official deadline to deliver the master thesis.
Final Thesis GRA19003 02.09.2013
66
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