"Organizational Models, Corporate Governance Structure and Initial Public Offerings (IPOs)

“Organizational models, corporate governance structure and Initial Public
Offerings (IPOs)”
Master Thesis
Xenofon Ntanis
TABLE OF CONTENTS
List of Figures ......................................................................................................................5
List of Tables .......................................................................................................................5
Abstract ................................................................................................................................7
Introduction ..........................................................................................................................9
Part One Theoretical Approach
Chapter 1 ............................................................................................................................ 12
1.1 Financial instruments ......................................................................................... 12
1.2 Initial Public Offering definition ........................................................................ 15
............................................................................ 17
1.4 IPOs in concept of advantages and disadvantages ............................................. 20
1.5 The steps to an IPO............................................................................................. 24
1.6 New York Stock Exchange (NYSE) listing requirements ................................. 33
1.7 Underpricing ....................................................................................................... 35
1.8 Brief view on U.S. IPO market activity ............................................................. 46
Chapter 2 ............................................................................................................................ 50
2.1 Corporate planning and the IPO process ............................................................ 50
2.1.1 Planning guidance for an IPO ..................................................................... 60
2.2 Management quality and IPO performance ........................................................ 62
2.3 Management and hostile takeover defenses of IPO firms ..................................64
3
Chapter 3 ............................................................................................................................ 68
3.1 Corporate governance and issuing companies ...................................................68
3.2 Corporate governance structure, performance and value of IPO firms .............. 72
3.3 IPO Underpricing and corporate governance structure ...................................... 77
3.4 Corporate governance, firm performance and dividend policy .......................... 81
3.5 Corporate governance and survivability of IPOs ............................................... 82
3.6 Corporate governance characteristics and evidence from empirical studies ...... 84
Part Two Empirical Approach
Chapter 4 ............................................................................................................................ 89
4.1 Testing hypotheses ............................................................................................. 89
4.2 Data description and methodology ..................................................................... 95
4.2.1 The Model ................................................................................................... 98
4.3 Empirical Results................................................................................................ 99
4.3.1 Descriptive statistics and correlation among variables ............................... 99
4.3.2 Regression results ..................................................................................... 102
Conclusion ....................................................................................................................... 107
References ........................................................................................................................ 111
Appendix .......................................................................................................................... 129
4
LIST OF FIGURES
1.1 Claims and financial markets ....................................................................................... 14
1.2 .......................................................................... 39
1.3 Underpricing over the years in U.S.............................................................................. 45
1.4 IPOs performance since 1990 ...................................................................................... 47
1.5 IPOs volume and value since 2005 (quarterly) ............................................................ 48
2.1 Elements of the strategic management process ........................................................... 52
2.2 The strategic planning process ..................................................................................... 54
2.3 The functional structure ............................................................................................... 56
2.4 Divisional structure ...................................................................................................... 57
2.5 Matrix structure............................................................................................................ 58
2.6 SWOT analysis ............................................................................................................ 60
LIST OF TABLES
1.1 Alternatives to IPOs ..................................................................................................... 16
1.2 IPO Expenses ............................................................................................................... 23
1.3 Biggest Underwriters based on proceeds ..................................................................... 25
1.4 The IPO steps ............................................................................................................... 31
1.5 NYSE listing requirements .......................................................................................... 35
5
1.6 Average initial returns for 33 countries ....................................................................... 36
3.1 Relations between underpricing and ownership structure according to Brennan and
Franks (1997) and Stoughton and Zechner (1998) ............................................................ 79
3.2 The relationship between corporate governance and firm performance ...................... 85
4.1 Detailed summary of hypotheses ................................................................................. 93
4.2 Sample summary statistics ........................................................................................... 97
4.3 Descriptive statistics (Mean, Median and Standard Deviation)................................. 100
4.4 Pearson correlation matrix ......................................................................................... 101
4.5 Most significant regression models (1-4) .................................................................. 103
4.6 Most significant regression models (5-7) .................................................................. 105
................................ 129
A.2 Regression results with Price-to-Book ratio as dependent variable.......................... 130
A.3 Regression results with Initial Returns as dependent variable .................................. 131
A.4 Regression results with Return on Assets ratio as dependent variable ..................... 132
6
ABSTRACT
The purpose of this study is to review the existing literature on Initial Public Offerings
aspects of this type of equity financing, such as underpricing, and to investigate for
interrelations between corporate governance, firm value and performance upon the IPO
completion. Firms undertaking an IPO have to adhere to a standardized process, which
obliges them to reassess and enhance their management, and to develop corporate
governance practices in alignment with the legislation and regulations of the State and the
Stock Exchange, respectively. Changes on corporate governance level are of great
importance for the post-IPO performance of the firm. Therefore, this study encompasses
an empirical approach in an attempt to present findings that reveal significant effects of
corporate governance characteristics over firm value and performance. This study
employs a sample comprising 66 companies of the transportation sector listed on
American stock exchanges.
Keywords: management; corporate governance; IPO
7
8
INTRODUCTION
There are many different types of financing, which individual investors, firms and
institutions can utilize in order to bring their investment plans into effect. Equity
financing and, its most prevalent form, initial public offerings (IPOs) have become an
markets more effectively, cheaply and easily than private companies. Nevertheless, the
process of going public has a number of implications for the issuers, which are related to
the changes that private firms have to undertake in order to fulfill their entry
requirements. Private companies have to develop or adapt their corporate governance
actions can influence the structure and the post-IPO operation of the firm. In addition, the
form of the firm after the IPO can be altered by the way that the issuance was promoted,
because the amount of shares as well as their allocation will form the latter ownership
long-run performance. It is, therefore, obvious that IPOs are interrelated with the
corporate governance characteristics.
Despite the fact that previous studies on IPOs (see, e.g. Beatty and Ritter, 1986;
Loughran at al., 1994, Booth and Chua, 1996; Mello and Parsons, 1998; Ritter, 1998;
Certo, 2003; Burton et al., 2004; Hill, 2006; Alavi et al., 2008; Bruton at al., 2010) and
corporate governance (see, e.g. Jensen and Meckling, 1976; Shleifer and Vishny, 1997;
Baysinger and Butler, 1985; Griffith, 1999, Burton, 2000; Filatotchev and Bishop, 2002;
Chahine, 2004, Chen et al., 2005; Ho, 2005, Setia-Atmaja, 2009; Giovannini, 2010) have
researched and attested various associations between corporate governance characteristics
and the performance of the IPO firms, questions regarding their interrelations continue to
arise due to the diverging and often low significance evidence. Further, there is little
attention drawn to the role of management throughout the IPO process.
governance practices impact on the value and the performance of firms after the IPO. In
9
particular, it argues that aspects of corporate governance such as the board size, the
s
structure, the percentage of ownership that insiders and blockholders have, influence
either negatively or positively the firm value and performance shortly after the IPO.
Moreover, it considers management as an important element of the IPO process; hence it
reviews relevant literature on management and IPO planning.
By employing a comprehensive approach, both theoretical and empirical, this

study endeavors to extend IPO literature even a little by presenting evidence from a
relatively small sample and hopes that will encourage further research on the subject. The
remainder of this study is organized and developed in four chapters. The first chapter,
financing, elaborating on public equity financing, and on the IPO process. In the
paragraphs of this chapter are presented the motivation, the benefits and implications
arising from an IPO as well as the steps and requirements for a public offering. Further, it
offers
presents a brief view of the U.S. IPO market activity.
the role of corporate planning and management in connection with the decision to go
management posture regarding the development of antitakeover defenses shortly after
1991).
The third chapter refers to the relationships between corporate governance and the
value and performance of IPO firms, offering a review of the existing literature. Further,
it examines the association of corporate governance with dividend policy and
underpricing. The last paragraph of this chapter views how corporate governance
characteristics are related with the survivability of post-IPO firms.
10
Finally, fourth chapter deals with an empirical approach of the relations reviewed
by the previous chapter. In this chapter, five central hypotheses are formed and tested by
employing methodology from previous studies. Descriptive statistics and results are
presented in the last paragraph of this chapter, which is followed by the conclusions.
11
CHAPTER 1
Theoretical Approach of Initial Public Offerings
1.1 FINANCIAL INSTRUMENTS.
In the developed economies, worldwide, business firms, individual investors and

governments have often an urge to raise capital for a number of reasons related to their
welfare. Therefore, financial markets offer the institutional framework for raising funds
by enabling them to trade financial instruments.
A financial instrument often called financial asset or financial security1 is a

2
. A holder of such claim is entitled to a future cash
payment from the issuer. For example, if the Greek treasury
government bond of 10-years, the holder of such is entitled to a payment upon
completion of the bond by the Greek treasury. Financial instruments differ considerably
and can be identified by the type of claim the holder has on the issuer, leading to different
type of financing and liabilities. Consequently, a distinction between them is of
fundamental importance. The type of claim that the holder has, can be either a dept or an
equity (or residual) claim. The former is referred to a pre-determined cash claim via the
rate of interest charged which may be fixed or variable. Whereas the latter obligates the
issuer to pay the holder an amount based on dividends once holders of debt instruments
have been paid3. Further, there are financial claims that involve both debt and equity,
1
These two terms shall be used interchangeably.
2
See Johnson, N. F., Jefferies, P., and P. M. Hui, 2003, Financial Market Complexity: What
physics can tell us about market behavior, Oxford: Oxford University Press, p. 5.
3
The difference between debt and equity claims lies in the levels of risk undertaken from the
investors. An equity claimholder has no guarantee that any cash flow will be paid, while debt
instruments face lower risk levels, because will be secured against the assets of the issuer and
repayment is definite. See Fabozzi, F., Modigliani, F., and F. J. Jones, 1996, Capital markets and
institutions and instruments, 2nd Ed., International Edition, Upper Saddle Valley, N.J.: Prentice
Hall International, p. 3, and Johnson, N. F., Jefferies, P., and P. M. Hui, 2003, op. cit., pp. 5-6.
12
which are called fixed-income instruments4
5
.
The markets, where these financial instruments are exchanged with other assets,
money, commodities, goods and services, are known as financial markets. Before
approaching financial markets, it is necessary to identify the most common used financial
product types6. Equity instruments are the common stocks, the preferred stocks and the
warrants. While, debt obligations, such as bonds and money market instruments along
with some preferred stocks, are fixed-income securities or debt instruments7. Depending
on the need that may serve, markets are classified accordingly. By the way of obtaining
funds, markets can be sorted to debt and equity markets. The latter is more commonly
referred as the stock market. Another market distinction goes by the maturity of the
claim. The market for short-term assets is called money market and the one for longer
maturity8 is the capital market. A third way of looking financial markets can be financial
claims perspective, whether are newly issued or not9. Primary market deals with issues of
new financial assets. On the other hand, secondary market deals with assets that have
been previously issued and can be resold.
Financial instruments are very important part of finance, because they carry out
two major functions, facilitating the markets. The first is transferring funds from those
who have surplus funds to invest to those who need them to invest. The second function
is related with the way this process takes place. The transfer must redistribute the
unavoidable the risk that is associated with the cash flow of the assets among those who
10
seek and provide the funds . In other words, the financial instruments are facilitating
the investments and increase the consumption, while transferring risk and money.
4
Fix-income instruments are the preferred stocks and the convertible bonds.
5
See Grinblatt, M., and S. Titman, 1998, Financial Markets and corporate Strategy, 2nd Ed.,
Irwin/McGraw-Hill, p. 5.
6
See McInish, T. H., 2000, Capital Markets a global perspective, Blackwell publishing, pp. 10-
12.
7
The other financial product types are derivatives such as options, futures and forwards, swaps
and warrants, and money (currency and deposits), see idem.
8
The maturity date must exceed at least one year.
9
See Fabozzi, F., Modigliani, F., and F. J. Jones, 1996, op. cit., p. 11.
10
See Ibid., p. 6.
13
Figure 1.1
Claims and financial markets
Source: Fabozzi, F., Modigliani, F., and F. J. Jones, 1996, Capital markets and institutions and instruments,
2nd Ed., International Edition, Upper Saddle Valley, N.J.: Prentice Hall International, p. 12.
By issuing securities in the primary and/or secondary market firms manage to

draw the desirable investment funds from public sources. This process represents a
crucial turning point for any private firm, allowing them to prosper even more. It is a
11
that a company should take realizing
the opportunities and threats, and waging the benefits and the cost it may reflect upon it.
Moreover, raising funds from the stock market requires the consideration of a variety of
structure, management, t
fulfillment of the legal and financial requirements, and the support of financial market
participants12.
11
See Pagano, M., Panetta, F., and L. Zingales, 1998, Why Do Companies Go Public? An
Empirical Analysis, Journal of Finance, Vol. 53, No. 1, p. 27.
12
As financial market participants are considered investment banks, financial institutions,
investment companies, brokers, regulators and others.
14
1.2 INITIAL PUBLIC OFFERING DEFINITION.
When a private company wants to raise capital on favorable terms through either debt or
13
equity and chooses occurs. An IPO
the expectation that a liquid market will develop14. In other words, the company converts
a portion of its ownership into shares of stock and then shares the business with public,
allowing investors to purchase that percentage15. The number of shares sold in the IPO
market incurs major changes, a ement, the
corporate governance practices and the ownership structure of the company, albeit the
company retains a large degree of control. Hence, the public flotation of the company
16
.
An IPO, as pointed out above, helps firms fund their investments and other
expenditures in an efficient way. A successful IPO undeniably leads to great rewards like
the IPO of VoIP provider Vonage (NYSE: VG) in 2006 that raised $2.6 billion.
Nonetheless, there are other ways raising external financing rather than going public.
Chemmanur and Fulghieri (1999) focus their research on the type of external equity
(private or public) that a company should be pursuing. They form a model in which the
choice of equity depends on the evaluation cost that a company bears and on the level of
diversification offered in each case. Relatively young small firms choose private funding
evaluation cost outweighs the greater rate of compensation (return) to the venture
capitalist. On contrary, large established firms seek for a public equity funding, because
they deal with smaller evaluation cost. The decision for a company to seek money
through public equity depends to a number of reasons related to the market, the incurred
13
Underpriced, Journal of Financial Economics, Vol. 15, No. 1-2, p. 188.

14
See Ritter, J. R., 1998, Initial Public Offerings, Contemporary Finance Digest, Vol. 2, No. 1, p.
6.
15
See Arkebauer, J. B., and R. Schultz, 1998, Going Public: Everything You Need to Know to
Take Your Company Public, Including Internet Direct Public Offerings, 3rd Ed., Dearborn
Financial Publishing, p. 5.
16
See Mello, A. S., and J. E. Parsons, 1998, Going Public and the Ownership Structure of the
Firm, Journal of Financial Economics, Vol. 49, No. 1, pp. 80-82.
15
cost and the general lineaments of the firm. The following table 1.2 presents alternative
funding to IPOs.
Table 1.1
Alternatives to IPOs
Type IPO Alternative Pro Cons

Debt Commercial No sharing of profits Dependent on sufficient net
bank/lender worth, income, or cash flow
Debt Asset-based No sharing of profits Dependent on sufficient

lending assets or cash flow has
higher borrowing costs
Other R&D/Investment Can result in favorably Dependent on a viable
partnership priced financing; could technology
or joint venture result in synergy and or other intangibles;
industry clout could result in a demanding
partner
Debt/Equity Institutional Can be simple few More sophisticated
parties involved investors
may negotiate a lower price
Debt/Equity Leverage An exit strategy or Company must have
ESOPs financing device with adequate security for lender
certain tax preferences (assets, income, or cash
flow)
Other Selling the Can permit a complete May result in lower pricing
company and certain exit by than an IPO, loss of future
existing shareholders upside tax considerations
16
Convertible Venture capital Can be simpler; added More sophisticated
Debt/Equity experience and investor may result in
reputation lower pricing for the
is brought to the company, plus there is an
company; focus is expected 5- to 7-year exit
more on future potential
than on current security
Source: PricewaterhouseCoopers, 2004, Roadmap for an IPO A Guide to Going Public, p.15.
1.3
Jenkinson (1990) refers to three main incentives which lead a company to go public. The
first and most common, is raising new equity finance to facilitate future investment. In
consistence with the previous, the second is the realization of an investment from the IPO
s17, who will be able to liquidate their
shares. The third incentive is attributed to the role of the stock exchange, which will give
access to additional equity finance and via secondary issues and direct exposure to
acquisitions and mergers process. Zingales (1995) in his theory of the going public
decision also draws attention to the fact that going public helps facilitate the acquisition
of a company in a higher value by raising the bargaining power of the owners.
Furthermore, Jenkinson (1990) notes that the proportion of equity issued is a variable
choice in order corporate control to be traded off against a larger amount of finance.
Similar motivations for a public issuance reiterate Ritter and Welch (2002). They imply,
as well, that a firm goes public in order to raise equity capital, create a public market in
which the founders and other shareholders can convert some of their wealth into cash at
future date, while they consider as a minor reason that firms go public to increase its
publicity. Another interesting motivation theory for an IPO form Chemmanur and
Fulghieri (1999) that focus on the diversification offered by the raise of public equity
finance, because funds are obtained from a large number of investors. This way, an IPO
17
Or venture capitalists (VCs), see Black, B. S., and R. J. Gilson, 1998, Venture Capital and the
Structure of Capital Markets Banks versus Stock Markets, Journal of Financial Economics, Vol.
47, No.3, pp. 244-245.
17
broadens the ownership base serving as a strategic move. From strategic, also,
perspective Maksimovic and Pichler (2001) find that a firm should take into account the
amount of disclosure information and the public perception before going public.
go public in response to favorable
market conditions, but only if they
Additional motivation theories are related to the cost that an IPO inflicts upon the
firm and the time that a firm should go public. Drawing from the cost of capital theories
Aggarwal and Rivoli (1991) argue that an informed decision requires an analysis of the
financial costs associated with the IPO, while considering advantages and disadvantages.
Subrahmanyam and Titman (1999) also agree that the choice of an entrepreneur between
private and public funding is determined by the cost of initial capital. The cost of capital
18
. Pagano,
Panetta and Zingales (1998) in their profound research argue that the cost of going public
acts as a hindrance under certain circumstances19
affects the issuance causing price misevaluation20. Companies are also reluctant to follow
the disclosure rules of the stock exchange, which will unveil crucial information for their
competitive advantage. As Campbell (1979) points out, losing confidentiality is a
in which the cost of an IPO prevents the
companies from going public can be found by considering the total amount of fees21.
Small firms cannot fill the bill of the fixed costs. Estimation made from Ritter (1987)
shows that the fixed costs in the United States during that time period were $250.000 and
the variable costs were about 7% of the gross proceeds of the IPO. In addition Arkebauer
(1994) estimated the total cost of an IPO for a company that makes $2 million in gross
revenues and has 3 to 5 year operating history approximately $1,123, 000. Of course, it
18
See Brau, J. C., and S. E. Fawcett, 2006, Initial Public Offerings: An Analysis of Theory and
Practice, The Journal of Finance, Vol. 61, No. 1, p. 406.
19
See Pagano, M., Panetta, F., and L. Zingales, 1998, loc. cit, pp. 36-38.
20
That can be either under- or over- pricing of the issuing stock.
21
Underwriting fees, registration fees, stock exchange fees and other minor fees can be an
important reason for postponing the going public decision.
18
must be kept in mind that costs vary based upon the complexity and the size of the IPO.
In their study Pagano, Panetta and Zingales (1998) add a few more reasons to the
likelihood of an IPO. They consider that taping public markets overcomes borrowing
constrains imposed by banks or venture capitalists providing an alternative funding.
Thus, through the stock market the company creates outside competition for the banks or
other lenders, because it circulates information to possible investors.
To further explore IPO motivation, the fact that time is an essential element for a
time IPOs to take advantage of favorable windows that allow them to get the most
22
. Firms may postpone an IPO, if the conditions in the stock
market are not favorable. Lowry (2003) found that IPO activity seems to increase, when
the economy is strong and the possibility for real investment is greater, and when there is
high investor demand. The time periods in which initial returns rise and IPOs increase are
described as hot-issue markets. In contrast, Chloe, Masulis and Nanda (1993) argue that
firms avoid issuing when other good-quality firms issue. Additionally, Grinblatt and
Titman (1998) argue that from demand side explanation firms would avoid going public
in hot issue periods, because of the high competition, while the supply side explanation
suggest that the greater supply of available funding will help achieving better deals.
The motives, that drive a firm to go public, do not have the same gravity in each
one. Depending on the size, the age, the ownership structure and other factors (e.g.
and Fawcett (2006) in their survey regarding the importance of certain motives to
conduct an IPO find out that the five most important motives commonly acknowledged
are:
To create public shares for use in future acquisitions,

To establish a market price/value for their firm,
To enhance the reputation of their firm,
To minimize their cost of capital, and
22
See Loughran, T., and J. R. Ritter, 1995, The New Issues Puzzle, Journal of Finance, Vol. 50,
No. 1, pp. 23-52. Cited by Brau, J. C., and S. E. Fawcett, 2006, loc.cit., p. 406.
19
To broaden the base of ownership.
From this survey, it is also noteworthy that the minimization of the cost of capital
is considered less important than the need to create public shares for use in future
23
.
To conclude, the likelihood of an IPO is in conjunction of the goals of each

company with the benefits emanating from the public offering. Nevertheless, it is
strongly recommended that the company should weigh benefits and costs, before going
public, because selling equity means forfeiting a portion of returns and undertaking
certain liabilities.
1.4 IPOS IN CONCEPT OF ADVANTAGES AND DISADVANTAGES.
Approaching the motivation theories for conducting an IPO, provides us with the
knowledge of the beneficial side of the procedure, while leaving behind the risky and
sorely consequences for the company. It is, therefore, essential to review the advantages
and disadvantages in total before approaching the IPO procedure. Each firm equilibrates
the procedure consequences and the benefits arising from it with a unique orientation to
their competitive advantage and resources.
Schneider, Manko and Kant (1981) have thoroughly laid down the common
advantages and disadvantages of an IPO. Among the first are the following:
1. Firms obtain funds from the securities sale in the primary market. While, in
2. By going public the net worth of the company is improved (above net asset and
s valuation and debt-to-equity ratio will improve
after going public24. That allows companies to borrow money in more favorable
terms. Further, in sense of good performance in the short- or long-run period, the
23
See Brau, J. C., and S. E. Fawcett, 2006, loc. cit., pp. 405-409.
24
See http://www.ipoinitialpublicofferings.com/ipo-pros-and-cons.
20
firm can seek capital through other offerings or private funding from institutional
investors with favorable terms.
3. The creation of a public market allows investors to buy securities with liquidity
and ascertain market value.
4. In public traded companies, expansion comes in form of acquisition using
com
5. A public company can use its stocks for managerial reasons (e.g. attract and retain
personnel).
6. Through public ownership, a company can gain prestige, publicity, and improve
its business.
7. The cost of capital is reduced due to the liquidity of
On the other hand, public traded companies bring on liabilities and costs such as
the following:
1. Public companies must disclose information such as sales, profits, competitive

position and mode of operation, and related parties, which can place them to
competitive disadvantage. In addition, the company bears constant scrutiny from
investors and analysts.
2. When a company becomes public, it loses some flexibility in management. The
reason is that the company is now responsible to the public. Furthermore, the
company loses its ability to act quickly, because the approval of shareholders or
outside directors might be needed.
3. The decisions of a public traded company have an impact on the market price.
Therefore, every management decision should have a rationale, before taking
action.
4. There are many fixed expenses for public companies, which occur from legal and
accounting fees, recurring expenses like the preparation and distribution of proxy
material and annual reports to shareholders, the preparation and filing with the
21
Securities and Exchange Commission (S.E.C.)25 of reports, and the expenditure of
fees for a transfer agent, a registrar and a public relations consultant.
5. An IPO is also time-consuming. The management devotes a lot of time to public
6. Insiders can easily lose control of the company, if a sufficiently large proportion
of shares are sold. The owners, who are aiming in retaining the management
control, are confronted with the underwriters, who are trying to assure a large
floating supply of the stock after the initial offering, diluting the control over
management.26
7. For companies that go public and belong in certain industries such as
transportation, it is difficult to change strategy or even to conduct asset play.
8. A public company might face tax issues, because the state tax valuation is
determined partly by reference to the public market valuation and can be
considerably higher than in a private company.
Among the disadvantages of the IPO procedure it is of great importance to

consider the defense ability against bad market conditions that Brau and Fawcett (2006)
denote in their research. They find out that the decisive reason, why private companies do
not want to be public, lies with the ability to avoid the consequences of poor
market/economic conditions. Such conditions coupled with a low stock price acts as an
incentive to withdraw. Another disadvantage for a public company, which is rather
implicit and it is considered as direct cost, is the high initial expense that it is incurred.
27
-in- ,
but if the IPO is withdrawn these costs must be expensed. The main costs are
25
The U.S. Security and Exchange Commission or S.E.C. is an agency which mission is to
protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation, by
key participants in the world of securities such as securities exchanges, securities brokers and
dealers, investment advisors and mutual funds, to promote the disclosure of important market-
related information, maintain fair dealing and protect against fraud. For more information, see
http://www.sec.gov/about/whatwedo.shtml.
26
Of course, management control can be retained by creating classes of stock (e.g. class A or
class B) which have different voting power. See Schneider, C. W., Manko, J. M., and R. S. Kant,
1981, Going Public Practice: Procedure and Consequences, Villanova Law review, Vol. 27, No. 1,
p. 5.
27
See PricewaterhouseCoopers, 2004, Roadmap for an IPO A Guide to Going Public, p. 11.
22
ts and miscellaneous
expenses (e.g. S.E.C. filling fee, NASDAQ or NYSE fee). Table 1.2 shows the typical
range of expenses. Additionally, every IPO bears the risk of being misevaluated. In other
words an IPO is possible to be underpriced, which is another indirect component of the
total cost28. Last but not least, a very important disadvantage is that there is no turning
back point. Once the company becomes public, it is very difficult and costly to return to
private form again.
Table 1.2
IPO Expenses
Cost Range
Legal $600,000 $800,000
Accounting $400,000 $600,000

Printing $150,000 $200,000
Blue sky $10,000
Transfer agent/registrar $5,000
Miscellaneous $60,000
Typically 7% of the aggregate offering proceeds
and commission
SEC filing fee $278 per $1 million of the aggregate offering amount
NYSE entry fee Up to $250.000
NYSE listing fees Maximum $500,000
Source: NYSE and PricewaterhouseCoopers, 2004, Roadmap for an IPO A Guide to Going Public, p. 11.
28
See Ritter, J. R., 1987, The Costs of Going Public, Journal of Financial Economics, Vol. 19,
No. 2, p. 5. For more information on underpricing see paragraph 1.7.
23
1.5 THE STEPS TO AN IPO.
In the event that a private company makes the big decision to go public, a hurdle race
begins. The IPO process is a complex, intense and high stress period for the
entrepreneurs, which involves a large number of parties (i.e. the issuer, the lead
underwriter, the syndicate, lawyers, the registrant, the accountants, the S.E.C., the
financial printer and others).
before the public offering, though for some it starts even on the day that they were
incorporated29. However, the eligibility of a company to go public depends highly on the
business plan it forms, the adequacy of its working capital and cash flow position, the
quality of its management, the compliance of its corporate governance and practices with
the necessary (legal) requirements of a public company, the professional relations that it
has with clients and banks, and its competitive advantage30. Companies that fill these
requirements and have better chances to succeed in public markets, are those that outpace
their industry average growth rate with annual revenues and profits at least $50 million
and $1 million or more respectively, are usually venture capital backed, sustain an
increasing annual growth rate, have an established position in their industry, and have
developed financial processes and a corporate reporting system. The issuing company
should be prepared in a way that will convince the investors that it is an attractive
investment opportunity. First, the company must expand its management capabilities.
Second, it should prepare budgets and try measure its performance by projections and
market share. Third, according to all major stock exchanges, a company/registrant should
appoint at least two independent directors31. Fourth, the company should create an
auditing committee to ensure the integrity and transparency of corporate reporting 32.
Fifth, the company should reexamine its corporate governance principles and practices.
Lastly, it is important from cost view the company to perform audits of financial
29
See PricewaterhouseCoopers, 2004, loc. cit., p. 39.
30
See Schneider, C. W., Manko, J. M., and R. S. Kant, 1981, loc. cit., pp. 6-9.
31
After the enactment of the Sarbanes-Oxley Act in 2002, one of the independent directors
should have previous financial experience, qualified as financial expert. See
PricewaterhouseCoopers, 2003, The Sarbanes-Oxley Act of 2002 and current Proposals by NYSE,
AMEX and NASDAQ, p. 5. Also see at http://uscode.house.gov/download/pls/15C98.txt
32
It is also imposed by Sarbanes-Oxley Act. See idem.
24
Every company wishing to make a public offering must first select an investment
bank, which is going to provide the essential guidance and perform the underwriting
functions. This selection is very crucial for the firm, because investment banking firms or
underwriters vary widely in prestige, financial strength and ability to provide services
expected by the issuing company33. In order to make the right choice, the company
should seek the underwriter(s) relied on few criteria. First, the issuing firm should
34
. Second, the
35
. Table 1.4, presents the top ten
managing and prestigious underwriters based on proceeds for the year 2010. In spite of
these selection factors, it is likely that the underwriter choice be influenced by the prior
relationships of the issuers or its board members, who retain ties with certain investment
banking firms. However, it is not necessary for a firm to choose one underwriter. An IPO
can be managed by one or many underwriters. In that case one of them is the lead
underwriter/manager, playing the major role in the procedure.
Table 1.3
Biggest Underwriters based on proceeds
Rank Underwriter Proceeds

1 Goldman, Sachs & Co. $5,156.1 mil
2 BofA Merrill Lynch $5,023.7 mil
3 Morgan Stanley $4,272.6 mil
33
See Schneider, C. W., Manko, J. M., and R. S. Kant, 1981, loc. cit., p. 7.
34
See Ibid,. pp. 7-8.
35
suer would like to see its securities held by individuals or by institutional
Ellis, K., Michaely, R., and M. O'Hara, 1999, A Guide to the Initial Public
Offering Process, Corporate Finance Review, Vol. 3, No. 5, p. 2.
25
4 Santander Investment $4,024.9 mil
5 Credit Suisse $2,526.4 mil
6 J.P. Morgan $1,887.8 mil
7 Citi $1,203.2 mil
8 Goldman Sachs (Asia) L.L.C. $1,151.6 mil
9 Deutsche Bank Securities $1,123.3 mil
10 Barclays Capital $647.0 mil
Source: Renaissance capital IPO home.36 (Date: August 2010)
The next step concerns a consultation and an underwriting agreement between the
issuer and the underwriter. Once the underwriter selection is made, the issuer discusses
and determines with the underwriter the class of the offered shares, the offered volume
and the offering price.
underwriter, which outlines the proposed terms of the offering and the underwriting
compensation37. The purpose of this agreement is to protect the underwriter from any
uncovered expenses, if the offer is withdrawn either during the due diligence and
registration stage or during the marketing stage38
b) an agreement by the issuing company to cooperate in all due diligence efforts, making
available all relevant information to the underwriter and its counsel, and c) a commitment
by the issuing company to grant a 15% overallotment option39 to the underwriter40. In the
agreement, the underwriter agrees that will purchase the total of the
shares being issued and then resell them to the public. The underwriter benefits from the
difference between the price the shares are bought from the issuer and the price they were
sold to the public41. Nevertheless, the underwriter takes a great deal of risk, if he fails to
36
See http://www.renaissancecapital.com/IPOHome/Underwriter/uMain.aspx.
37
See Schneider, C. W., Manko, J. M., and R. S. Kant, 1981, loc.cit, p. 24.
38
See Ellis, K., Michaely, R., and M. O'Hara, 1999, loc. cit., p. 4.
39
rwriters have from SEC to offer and
sell to the public more shares than the underwriters are obligated to purchase under the
W., Manko, J. M., and R. S. Kant, 1981, loc. cit., p. 25.

40
41
issuer and the price at which the investment bank reoffers the securit
26
find public purchasers. Hence, in large IPOs, where the risk is greater, a group of
underwriters is preferred. The compensation of those underwriters is related to the gross
spread. The lead underwriter receives a fee for its efforts that is 20% of the gross
42 43
spread the underwriter and the syndicate
members receive each one a part based on the amount of the issue they sold to its
customers. The last portion of the gross spread is used to cover underwriting expenses. In
case of anything remaining after the deduction of the expenses, it is divided
proportionally among the underwriter and syndicate members according to the amount of
shares each underwrote44
45
. The underwriting agreement is executed in
pricing, until then the letter of intent will remain in force. In a risky issuing the
underwriter may choose this type of agreement in attempt to shift the risk to issuer.
The following step for the issuing company is to assure a clearance to sell
securities to the public from the Securities and Exchange Commission (S.E.C.) by filing a
registration statement in accordance with legislation. Offering securities to the public,
without first having them registered, it is illegal. The registration process governed by
Securities Act of 1933 has two main purposes: a) requires that investors receive financial
and other significant information concerning securities being offered for public sale, and
b) prohibits deceit, misrepresentations, and other fraud in the sale of securities46. The
S.E.C. has no authority relating to the prohibition of a public offering judged from the
quality of the securities and also cannot determine, whether a security is fairly priced or
not47. It only has the authority to require from issuers to disclose all the necessary
difference is called gross spread, see Fabozzi, F., Modigliani, F., and F. J. Jones, 1996, op. cit., p.
101.
42
43
It is the second portion of the gross spread, which is equal to 60% of the total gross spread, and
it is the compensation that the underwriter receives for selling the securities. See, idem.
44
See idem.
45
46
47
States in U.S. attempted to provide investors an ascertainment whether a security is fairly
priced in order to protect them from fraud. These provisions wer
27
information. Hence, the registration is the disclosure of important financial information,
which enables investors to make informed judgments about purchasing or not a
r losses from purchasing securities,
assert recovery rights by proving that the disclosure of important information was
incomplete or inaccurate48. In order to avoid unpleasant situations where purchasers of
the securities are damaged and seek compensation,
latter provides to the investors.
The registration statement is considered as a two-part disclosure document. The

first part is the prospectus, which should be delivered to every perspective purchaser of
the offering shares; it is the legal offering document49. It is a brochure, which describes
the company and the offering securities. On the other hand, the second part of the
statement contains supplemental information that will be available for public inspection
by the S.E.C.
Additionally, the registration forms used in the statement and the detail level
required, as well, depend upon the size of the company, the amount of money being
raised, and the age of the company50. In short, the most common form used for large
offerings is Form S-151. For companies with revenues less than $25 million Form SB-2 is
used. Whereas, for the small offerings those up to $5 million Form S-18 is required.
Before filing the registration statement to the S.E.C., the issuing company
counsel is responsible for the non-financial parts of the statement. There are several
revisions of the statement before its final form. In the mean time, meetings of the
Offerings, Contemporary Finance Digest, Vol. 2, No. 1, p. 2.

48
49
50
See Ritter, J. R., 1998, loc. cit., p. 8.
51
For foreign companies the form required is the F-1 form.
28
counsel and accountants are taking place in regard to the draft statement, causing
additional delay, expense and sometimes irritation.
Once the registration statement is completed and filed with the S.E.C., it is now
52
. The S.E.C. will respond to the
initial filing, by approving it and declaring the issue effective in a 20-day period. During
deficiencies in the statement needed t
Otherwise, a new prospectus should be prepared and circulated to all concerned. It is

important to note that prior to the initial filing of the registration statement, no public
offering, either orally or in writing is permitted53
permitted. Consequently, the lead underwriter will start promoting the IPO through a
-4 weeks in which the company
officers will make presentations to salespeople and institutional investors. The main
institutional investors, which will raise the demand of the offering and affect the pricing.
These indications made by individual investors and institutions differ in several ways.
The former express their interest early for a specific quantity, while the latter submit
orders that limit the demanded quantity in regard to a maximum price. Furthermore, the
their order is fulfilled54.
The final step to the public offering starts after the registration statement has been
approved and deemed effective. Judging from the market conditions, the issuer makes a
52
This legend connotes that the registration filed has not yet become effective and that securities
cannot be sold or bought prior to the effective date. See Schneider, C. W., Manko, J. M., and R.
S. Kant, 1981, loc. cit., p. 22. The preliminary prospectus does not contain information about the
price and the effective date, because they are not yet specified.
53
54
29
its discretion and waive
the 20-day period55. The issuer depends on the approval of this request, otherwise must
wait for the waiting period to elapse, and makes changes to the registration statement,
that would assure also the cooperation of the Commission.
The day before the effective date and after the market closing, takes place the
most important meeting of the issuer and the (lead) underwriter. They will assess the
of the selling shares. Regarding the latter, typically the issuing companies sell 20-40% of
its stock to the public. Next, they execute the underwriting agreement; print the final
prospectus and file on the morning of the effective date a price amendment. Once the
amendment is approved, the company stock is traded for the first time.
Three to five business days after the effective date comes the closing of the
transaction. The closing is a formal meeting, where the issuing company delivers the
registered secu
account. For the next 25 days after the IPO the S.E.C. mandates that underwriters cannot
56
has still not
ended. Duri
issuing company signed as a provision in the underwriting agreement, comes also into
for
shareholders of the company cannot sell their shares for a period of time after the IPO is
year57 58
and its effects.
55
56
The quiet period commences once the issuing company and the underwriter reach an
understanding and ends 90 days following the effective date of the registration statement, if the
firm is not listed on a stock market. See PricewaterhouseCoopers, 2004, loc. cit., p. 99.
57
See Deloitte, 2010, Strategies for Going Public, 3rd Ed., February 2010, p. 41.
58
Flipping is the practice of buying shares of issuing firms at the IPO and then reselling them for
a substantial profit once the trading has begun. Flipping can be most profitable in a hot IPO
market, where the underpricing reaches high levels.
30
After the IPO, the underwriter continues to play an important role as the principal
market maker. To this end, it undertakes the task to stabilize the price of the stock in the
aftermarket. The underwriter can support the stock price, if it falls at or below the
an orderly trading market without additional shares to be dumped into the market59.
In this post IPO period, the company will enjoy the benefits of this transition to
the public markets. Nevertheless, this new environment is demanding and high
competitive, signifying that the company in order to attain its long term goals, must
maint
Even though there was a broad presentation of the IPO process, has become clear,
and the guidance and cooperation of experienced underwriters and other contributing
parties (especially the S.E.C.). To conclude, table 1.5 presents the IPO procedure in
respect to the time needed to its fulfillment.
Table 1.4
The IPO steps
2 Years 4-5 Months 3 Months (100 Days) 20 Days 1-10 Days Offering Day
Company Act like a Select the Execute

public team; Hold underwriting
company organizational begins; agreement;
Execute letter of Executives Issue press
meeting intent: Select printer perform release
& transfer agent;
statements and ensure

their compliance with
Regulation S-X
59
See idem.
31
Company Perform Clear S.E.C. Pricing
Council comments amendment
company records; filed;
Draft S-1; File w/the Acceleration
SEC; File NYSE or requested;
NASDAQ listing File final
application registration
statement
Independent Complete audit of Audit/review Deliver Deliver Final
Counsel annual and review of updated Draft
interim financial ,financial
statements; Review statements,
registration statement if necessary;
Respond to
S.E.C.
comment
letter
Investment Assess market; Make Distribute Form Execute
Banker presentation to board; syndicate; underwriting
Continue due Place agreement;
diligence Orchestrate Run tomb-
stone ad
Solicit
expressions
of interest
Investment Begin due diligence; Clear NASD Continue
Prepare NASD Regulation
Counsel Regulation filing; comments
filings
Financial Print Print final
Printer preliminary registration
registration statement/
statement/ prospectus
prospectus
(red
herring);
Produce
SEC
32
& NASD
Regulation
S.E.C. Conference Review Declare

regarding preliminary offering
"problems", registration effective
if necessary statement;
Issue
comment
letter
Source: PricewaterhouseCoopers, 2004, Roadmap for an IPO A Guide to Going Public, p. 35.
1.6 NEW YORK STOCK EXCHANGE (NYSE) LISTING REQUIREMENTS.
A very important aspect of the going public process, that should not be overlooked, is
related to the registration filed to the preferred stock market. Even though, it is
compulsory
investors, maintain fair, orderly and efficient markets, and facilitate capital formation by
overseeing and regulating the U.S. securities markets60. Consequently, the company
ne
stock exchange is a self regulated organization, which has additional listing requirements
highest, signifying that companies meeting these requirements are in leading position in
The NYSE listing process commences shortly after filing the registration
statement with the commission. The issuing company contacts the stock exchange and
requests a confidential review of eligibility. Once, the exchange provides the company
with a letter notifying it of its eligibility clearance and conditions of listing, the issuing
company is ready to file the listing application. For the approval of the NYSE, the
minimum financial and qualitative requirements must be met by the issuing company.
60
33
The financial standards involve the distribution of shares, the stock price and certain
other financial requirements such as cash flow, earning, and others which depend on the
structure, governance and practices, corporate responsibility and disclosure issues. The
following table 1.5 presents broadly the minimum financial requirements.
The fulfillment of the stock exchange requirements is a process incorporated to
preparation stage is orientated in enhancing the management and bringing the necessary
transparency.
34
Table 1.5
NYSE listing requirements
Source: Deloitte, 2010, Strategies for Going Public, 3rd Ed., February 2010, p. 57.
1.7 UNDERPRICING.
In IPOs theory a very common phenomenon, which have been rigorously

analyzed by the literature, is underpricing. The underpricing exists in every country with
35
61
the
large initial returns62 63
. Ibbotson et al. (1994) and
Loughran and Ritter (2004) note that underpricing level for the U.S. market in the period
1980-1989 was 7% and from 1990-
-2000 exploded to more than 65% only to fall back to 12% in 2001-200864.
Table 1.5 presents the average initial return of IPOs in 33 countries. The average initial
return varies considerably from country to country.
Table 1.6
Average initial returns for 33 countries
Country Author(s) of Article(s) Sample Time Average

Size Period Initial
Return
Australia Lee, Taylor & Walter 266 1976-89 11.9%
Austria Aussenegg 67 1964-96 6.5%

Belgium Rogiers, Manigart & Ooghe 28 1984-90 10.1%
Brazil Aggarwal, Leal & Hernandez 62 1979-90 78.5%
Canada Jog & Riding; Jog & Srivastava 258 1971-92 5.4%
Chile Aggarwal, Leal & Hernandez 19 1982-90 16.3%
China Datar and Mao 226 1990-96 388.0%
Denmark Bisgard 32 1989-97 7.7%
Finland Keloharju 85 1984-92 9.6%
France Husson & Jacquillat; Leleux & 187 1983-92 4.2%
Muzyka; Paliard & Belletante
61
See Doeswijk, R.Q., Hemmes, H. S. K., and R. H. Venekamp, 2006, 25 Years of Dutch IPOs:
An Examination of Frequently Cited IPO Anomalies within Main Sectors and during Hot- and
Cold-Issue Periods, De Economist, Vol. 154, No. 3, p. 407.
62
Initial returns and underpricing would be used interchangeably.
63
See Ritter, J. R., 1998, Initial Public Offerings, loc. cit., p. 4.
64
See also Figure 1.3 with the underpricing rates in the U.S.
36
Germany Ljungqvist 170 1978-92 10.9%
Greece Kazantzis and Levis 79 1987-91 48.5%
Hong Kong McGuinness; Zhao and Wu 334 1980-96 15.9%
India Krishnamurti and Kumar 98 1992-93 35.3%
Israel Kandel, Sarig & Wohl 28 1993-94 4.5%
Italy Cherubini & Ratti 75 1985-91 27.1%
Japan Fukuda; Dawson & Hiraki; Hebner 975 1970-96 24.0%
& Hiraki; Pettway & Kaneko;
Hamao, Packer, & Ritter
Korea Dhatt, Kim & Lim 347 1980-90 78.1%
Malaysia Isa 132 1980-91 80.3%
Mexico Aggarwal, Leal & Hernandez 37 1987-90 33.0%
Netherlands Wessels; Eijgenhuijsen & Buijs 72 1982-91 7.2%
New Zealand Vos & Cheung 149 1979-91 28.8%
Norway Emilsen, Pedersen & Saettern 68 1984-96 12.5%
Portugal Alpalhao 62 1986-87 54.4%
Singapore Lee, Taylor & Walter 128 1973-92 31.4%
Spain Rahnema, Fernandez & Martinez 71 1985-90 35.0%
Sweden Rydqvist 251 1980-94 34.1%
Switzerland Kunz & Aggarwal 42 1983-89 35.8%
Taiwan Chen 168 1971-90 45.0%
Thailand Wethyavivorn & Koo-smith 32 1988-89 58.1%
Turkey Kiymaz 138 1990-95 13.6%
United Dimson; Levis 2,133 1959-90 12.0%
Kingdom
United States Ibbotson, Sindelar & Ritter 13,308 1960-96 15.8%
Source: Updated version of table 1 on Loughran, T., Ritter, J. R., and K. Rydqvist, 1994, Initial public
offerings: International insights, Pacific-Basin Finance Journal, Vol. 2, No. 2-3, p. 167. Cited by Ritter, J.
R., 1998, Initial Public Offerings, Contemporary Finance Digest, Vol. 2, No. 1, p. 5.
In real terms, the underpricing signifies an indirect cost to the IPO issuers. It is a
form of compensation to the underwriters. It means that a large amount of money was
37
shares, because the offering price was not close to the demand and could have been
65
. A broad example of such underpricing is the
ith Morgan Stanley as the lead underwriter. The opening share
price was $28.00 and the volume was 4.25 million shares. The closing market price of the
share was $58.25, leaving near $129 million on the table. That might be a very good
reason why the issuers should be upset. But, Loughran and Ritter (2002) propose a
prospect theory that could unravel the situation. Their theory assumes that issuers care
more about the change in their wealth than the level of wealth, and predicts that the loss
of wealth from leaving money on the table will be balanced by the gain on the retained
shares from a price jump, producing a net increase in wealth for pre-issue shareholders66.
65
on the Table in IPOs? The Review of Financial Studies Special, Vol. 15, No 2, pp. 413-418.
66
For more information, see idem.
38
Figure 1.2
since 1990
36.94
29.69
6.80 5.65
3.52 4.38 4.54 5.25 3.86 2.64 3.95 4.95
1.82 2.97
0.34 1.50 1.47 113 1.00 1.46
Source: Ritter, J. R., 2010, Some Factoids about the 2009 IPO Market, University of Florida, p. 2.
The key to understand why IPOs are underpriced lies within the valuation
process67. Due to the fact that many IPOs belong to young growth companies the use of
accounting information is limited in order to project future cash flows. Hence, the
valuation relies heavily on market conditions and estimations.
Many theories were developed to explain the underpricing phenomenon in

relation with market knowledge (asymmetric and symmetric information), market
67
and underwriter assess the market conditions and the results from the book-building. See Ellis,
K., Michaely, R., and M. O'Hara, 1999, loc. cit., pp. 7-8, Loughran, T., and J. R. Ritter, 2004,
Why Has IPO Underpricing Changed Over Time? Financial Management, Vol. 33, No. 3, pp. 7-
9, and Ritter, J. R., 1998, loc. cit., pp. 19-20.
39
functions, corporate ownership and other practices68. Ljungqvist (2006) groups the
theories of underpricing in four broad headings:
69
reasons, . Thus, he marks that the
asymmetric information based models are the best established.
Asymmetric models assume that among the concerned parties (issuers,

underwriters and investors) in the IPO one of those is more informed than the others.
Baron and Holmstrom (1980) assume that underwriters (e.g. investment bankers) are
more informed about the market conditions (demand) and exploit their market knowledge
to underprice issues, which permits underwriters to minimize the marketing and ingratiate
70
. Habib and Ljungqvist (2001) share the same position, arguing that
underpricing allows cost saving in other areas of marketing, hence is an alternative for
costly marketing expenditures. Baron (1982) reiterates that information asymmetry in
which issuer is less informed relative to its underwriter, leads to a principal-agent
problem. The issuers try to induce the underwriter to put in the requisite effort to market
shares by permitting some underpricing, because monitoring the underwriter comes not
without a cost. Beatty and Ritter (1986) note that investment banks have an incentive to
ensure that new issues are underpriced by enough lest they lose underwriting
commissions in the future, and coerce issuers to underprice their offerings.
Underpricing results as well from asymmetric information, when some investors

know more than other investors. Rock (1986) suggests that there are investors better
informed about the true value of the shares of an IPO than other investors, the issuing
firm or its underwriting bank. That has as a result, the informed investors to bid only for
attractively priced IPOs, whereas the less or uninformed to bid indiscriminately. The
uninformed investors will receive all the shares they have bid for on the unattractive
IPOs, while in the attractive IPOs they will be crowed out by the informed. Then, they
68
See Brau, J. C., and S. E. Fawcett, 2006, loc. cit., pp. 414-415, for a rigorous analysis.
69
See Ljungqvist, A. P., 2006, IPO Underpricing: A Survey. in: Eckbo, B. E. (ed.), Handbook of
Corporate Finance: Empirical Corporate Finance, Volume A, Chapter 7, Amsterdam:
Elsevier/North-Holland, p. 2.
70
See Ritter, J. R., 1998, loc. cit., p. 14.
40
71
. The less informed investors will purchase shares, if the IPO
is underpriced sufficiently to compensate them for the bias in the allocation of new
issues. In case that the uninformed receive 100% allocations in overpriced IPOs, then
their average returns will be negative. If that happens, uninformed investors will feel
reluctant to bid for IPO allocations and the market will be consisted with informed
investors. Rock (1986) also argues that existence of uninformed investors in the primary
market is important, in sense that informed demand is insufficient to take up all shares on
offer even in attractive offerings. Moreover, he underlines that rationing per se does not
necessitate the underpricing, on the contrary, it is the bias in rationing with uninformed
investors expecting more rationing in good than in bad offerings. Another interesting
theory on rationing has formed Welch (1992) to describe the effects of pricing offers too
high. He assumes that investors attempt to judge the interest of other investors around hot
offering. When investors find that the pricing of the offering is high and the probability of
failure is also high, then they abstain from purchasing. That behavior influences and other
72
.
However, Hanley and Wilhelm (1995) disagree with Rock (1986), showing that
the difference in the size of allocations which institutions receive in underpriced and
overpriced issues is little. Furthermore, institutions do not appear to selectively choose
the best offerings. The different level of information that investors have, causes them an
uncertainty around the IPO firms, which biases the offering prices lower than the future
market price (Beatty and Ritter, 1986).
When investors have an information advantage, Benveniste and Spindt (1989)

argue that underpricing will compensate investors for sharing their information before the
offering price is settled. The same opinion with Benveniste and Spindt (1989) also share
Benveniste and Wilhelm (1990) and Spat and Srivastava (1991), who argue that
underpricing rewards investors for revealing accurate valuation information during the
book-building process. In this process the underwriters and the issuers try to elicit
71
model. For more information, see Ljungqvist, A. P., 2006, loc. cit., p. 11.
72
See Ritter, J. R., 1998, loc. cit., pp. 8-9.
41
indications of interest from prospective investors, which are used in setting the price.
This task is accomplice by taking t
investors. If the demand is strong, the underwriters will set the offering price high.
Knowing this the investors must be induced by underwriters with a combination of more
IPO allocations and underpricing, if only they indicate willingness to buy shares at high
price. The book building resembles to a market feedback process. Depending on the
response of the market the respective trade off among underwriters and investors takes
place.
A last case of underpricing caused by asymmetric information is based on the

assumption that the issuers are the better informed. This assumption is advanced by
Welch (1989), arguing that high quality issuers in order to distinguish themselves from
the low quality issuers will deliberately sell their shares at a lower price than the market
believes they worth. Acting like this, the high quality issuers deter the others from
imitating them and signal their quality to the investors. The issuers by sending
underpricing signals follow a dynamic issue strategy in which their IPO will be followed
by other seasoned offerings73. However, Michaely and Shaw (1994) find no evidence of a
higher propensity to return to the market for a seasoned offering. In respect with
signaling theory74, it is worthy to note that Demers and Lewellen (2003) assume that
stocks are underpriced so IPO firms can bring attention their offering.
Following Ljungqvist (2006) sorting of underpricing theories, the institutional

approach gives us interest insights on the subject. Institutional theories centre on three
features of the marketplace: litigation, stabilization activities from investment banks and
taxation. Regarding the first, Logue (1973) and Ibbotson (1975) point out that companies
sell their stock at a discount to reduce the likelihood of future lawsuits from disappointed
shareholders by the post IPO performance of their shares. Nevertheless this explanation is
not economically significant in many countries around the world75. In favor of the
litigation explanation are Tinic (1988) and Hughes and Thakor (1992), who argue that
73
See Welch, I., 1989, Seasoned Offerings, Imitation Costs, and the Underpricing of Initial
Public Offerings, Journal of Finance, Vol. 44, No. 2, p. 421-422.
74
For a thorough approach of signaling theory, check Ljungqvist, A. P., 2006, loc. cit., pp. 36-39.
75
E.g. Australia, Finland, Germany, Japan, Sweden, Switzerland, U.K.
42
underpricing may act like insurance against lawsuits for violations relating to IPOs
(securities litigation). At this point it is important to underline that the Securities Act of
1933 makes all participants in the offer who sign the prospectus liable for any material
omissions. Hence underpricing is a way of reducing frequent and severe lawsuits.
However, Drake and Vetsuypens (1993) find that underpricing did not protect IPOs from
being sued76.
From price stabilization approach, Benveniste, Bubasa and Wilhelm (1996) argue
building process helps underwriters convince investors that the issue will not be
intentionally overpriced. Price support benefits mainly institutional investors
e IPO investors, in the

sense that stabilizing activities put a floor under early after-market prices and thus act as
77
. The third part of the institutional approach of
underpricing is in conjunction with taxes. Rydqvist (1997) argues that underpricing may
be advantageous from tax point of view. He bases this argument, relying on his
observations made in Sweden. At the same time, Taranto (2003) puts forward a similar
argument. He argues that a quirk of U.S. tax law may increase
incentive78.
shareholder base so as to reduce intervention by outside investors once the company is
76
Lowry, M., and S. Shu, 2002, Litigation Risk and IPO Underpricing, Journal of Financial
Economics gher
Welch, 2002, A Review of IPO Activity, Pricing, and Allocations, The Journal of Finance, Vol.
57, No. 4, p. 1807.
77
See Ljungqvist, A. P., 2006, loc. cit., p. 46.
78
For more details, see Taranto, M. A., 2003, Employee Stock Options and the Underpricing of
Initial Public Offerings, Working Paper, University of Pennsylvania - The Wharton School, p. 34.
43
79
. In addition, a company may intentionally underprice their shares, generating
excess demand, in order to disperse them to a larger number of shareholders. This
ownership dispersion will increase the liquidity of newly public firm (Booth and Chua,
1996). In accordance with this argument are Brennan and Franks (1997). They agree that
underpricing allows for a wide base of owners, although the find the motivation in
entrenching management. Moreover, they argue that through underpricing the firm also
entrenches the agency cost by avoiding monitoring from a large outside shareholder. In
contrast to them, Stoughton and Zechner (1998) suggest that underpricing may be used to
minimize agency costs by encouraging monitoring80.
The last group of theories dealing with underpricing is the behavioral

explanations. They assume the presence of (irrational) investors that bid up the price of
IPO shares even though their value does not represent the true one, and issuers that are
subject to behavioral biases, failing to pressure underwriting banks in order to reduce
underpricing81. Loughran and Ritter (2002) propose a behavior theory suggesting that
issuers are pleasantly surprised by the amount they raised in the IPO. Thus, issuers are
not concerned with the underpricing82. While, Ljungqvist, Nanda and Singh (2006)
the IPO firm and the issuers and investment bankers target them in their marketing.
Specifical
valuation over the fundamental value of their stock. Hence, providing more stock to the
market depresses the price and the underwriters hold back stock to keep price from
falling83.
Lastly, a few interesting explanations of underpricing IPOs relate to marketing

functions and the facilitation of questionable practices. In conjunction with marketing,
Boehmer and Fishe (2001) demonstrate that underpricing increases the after-issue trading
volume of the stock84. Underpricing, on the other hand, can make possible questionable
79
80
See idem.
81
See ibid., p. 61.
82
See Brau, J. C., and S. E. Fawcett, 2006, loc. cit., p. 415.
83
84
See Brau, J. C., and S. E. Fawcett, 2006, loc. cit., p. 414.
44
practices like spinning85, suggested by Siconolfi (1997), Maynard (2002) and Griffith
(2004). Further, Ljungqvist and Wilhelm (2003) assert that through directed share
programs underpricing enriches friends and family. While, underpricing according to
Aggarwal (2003), Fishe (2002) and Krigman, Shaw and Womack (1999) provides
favored investors the practice of flipping.
Figure 1.3
Underpricing over the years in U.S
80,00%
70,00%
60,00%
50,00%
40,00%
30,00% Underpricng
20,00%
10,00%
0,00%
Years
Source: Ritter, J. R., 2010, Some Factoids about the 2009 IPO Market, University of Florida, p. 2.
In the process of going public, underpricing represents a fundamental feature of

the IPO market. It is of great importance to understand the reasons, which lead to
underpricing, and also to consider it as a mechanism that has ambiguous results for the
issuing company. Nevertheless, the issuing company should cooperate and consult the
85
Spinning refers to the practice of the underwriter/investment bank to offer underpriced shares
of the issuing company to senior executives of a third party company in exchange for future
business with him.
45
underwriter relied on IPO stable valuations to agree on the underprice level that will not
severely affect the long-
1.8 BRIEF VIEW ON U.S. IPO MARKET ACTIVITY.
In the recent history of the U.S. IPO market, there were at least three major turning
points, which indicate the cyclical nature of this market and the effects of global
economy, causing the market to change from se
(Ghosh, 1990). During the 90s, the demand for high technology or internet IPOs was
skyrocketed twice. The year 1996 was considered as the record year of issuing; according
to Ritter (2010) 675 IPOs were issued, raising aggregate $42.25 billion. The sectors with
the highest IPOs were business software, mortgage finance and telecommunications
services86. Three years later, the IPO market experienced another breakthrough of IPO
issues. The total IPOs issued in 1999 was 544, though the money raised reached the
highest until today
87
. Nevertheless, the high demand for internet IPOs, which fueled the previous
on of the internet sector and the little
earning margin. Hence, in 2000 the collapse of the internet market drew down, as well,
the IPO market. The lowest point in the IPO market history was recorded on January
2003, where no IPOs were offered, setting a negative record.
86
See Ghosh, A., 2006, The IPO Phenomenon in the 1990s, The Social Science Journal, Vol. 43,
No. 3, p. 488.
87
See idem.
46
Figure 1.4
IPOs performance since 1990
Source: Ritter, J. R., 2010, Some Factoids about the 2009 IPO Market, University of Florida, p.2.
For the period 2004-2007 the IPO market had managed to remain stable with a
relatively high issuing activity. As of October 2008, the crisis in the credit markets and
the loss of confidence in the capital markets, were enough to deter companies for
pursuing an IPO. In 2008, the IPO activity compared to 2007 was dropped significantly,
with the exception of the Visa Inc. IPO, which raised $17.9 billion and being placed as
one of the biggest in the world. The last two quarters of 2008, was considered the slowest
since 70s. The total number of IPOs issued was 57 with proceeds of $29.4 billion.
47
Figure 1.5
IPOs volume and value since 2005 (quarterly)
Source: PricewaterhouseCoopers, 2010, Executing a successful IPO For companies serious about going
public - the time to prepare is now, p. 3. Updated from PwC internet site, NYSE and NASDAQ.
In the first quarter of 2009 the IPO market resumed the same trend of low activity
of the previous year. During the first two quarters only 14 IPOs were issued with an
offering value of $2.3 billion combined. From the third quarter of 2009 that the markets
began to stabilize, there was a rebound of the IPO market, giving signs that the
quarter of 2009 was considered as a great recovery; especially if it compared with the
fourth quarter of 2007 the difference in offering value is only 16.1% (or $3.3 billion).
Ultimately, 2009 ended with 69 issues and an offering value of $25.2 billion.
The IPO market in the first quarter of 2010 showed an increase in compare to the
same period in the previous two years, promising an upward tendency for the whole year.
The number of IPO issued this first quarter is 27, raising $4.1 billion.
48
Since 1990 the IPO market experienced many down- and upward tendencies
resulting from both the demand and supply sides. Recently, a very interesting observation
under consideration by the IPO literature. Lowry and Schwert (2002) find that there is a
positive relation between the information learned during the registration period and the
future volume of IPOs. Nevertheless, the IPO market is influenced by a rather large
number of factors that are more related to the economic situation, the underwriters and
the available information.
49
CHAPTER 2
Management and the Initial Public Offering Process
2.1 CORPORATE PLANNING AND THE IPO PROCESS.
It has already been argued that a private company undergoing a public transformation via
an IPO has to make crucial decisions in a short time period with great implications to its
future operation. Further, it is stressed that a firm aiming at equity markets should start
operating as a public one for a reasonable amount of time88 before the anticipated issuing
gement should, in due course, introduce a
objective. By employing a corporate planning system, the firm adopts changes regarding
the organization structure, the top management team operation and the monitoring,
and performance while meeting its own particular needs and goals.
Corporate planning, which is a dimension of management, can be considered as

89
organizing the work, people, and system to enable those objectives to be attained,
motivating through the planning process and through the plans, measuring performance
and so controlling process of plan, and developing people through better decision-
90
.
been the subject of corporate literature since the 1960s. Corporate planning is long since
then well established in the business and academic world. A vast number of studies have
flourished, presenting the merits of corporate planning and at the same time examining it
88
That time in certain cases starts at least two years before the IPO procedure, while there are
companies established with the solely purpose of becoming a public traded firm. See Table 1.4.
89
See Hussey, D., 1974, Corporate planning: Theory and Practice, Pergamon Press: Oxford, pp.
24-26.
90
See Drucker, P. F., 1955, The practice of management, Heinemann. Cited also by ibid, p. 5.
50
There are many reasons why corporate planning constitutes such a necessity to
companies, when one takes into account the benefits arising from it. By applying a
corporate plan, the firm can primarily make assessments on its strengths and weaknesses,
as well as identify and turn to advantage opportunities that otherwise would have been
overlooked. In addition, planning improves the communication among agents, which in
certain cases reflects a great cost to all stakeholders. Agency theory sets forth that a
conflict of interest between corporate insiders (e.g. managers, controlling shareholders)
and outside investors (e.g. minority shareholders) exists91, though impacting not on
corporate best interests, because insiders in dispersed corporations have a tendency to use
corporate assets with detrimental effects on the outsiders.
With corporate planning certain organizational challenges can be overcome. Thus,

planning can constitute the main reason for organizational changes. The contribution of
corporate planning to the firm can be viewed by real and tangible results, indicating that
firms using planning activities can sustain both growth and profitability. Moreover, the
attainment of the certain objectives presumes clarity of purpose as well as actions, which
a corporate plan facilitates in appointing. However, the most essential benefit of
corporate planning is the enhancement of co-ordination and decision-making processes.
The success of corporate planning is reflected to the immediate effects of the decision-
making. Decisions concerning tough issues such as the type of funding or investment,
determine the course of the business activity. Nonetheless, corporate planning does not
mean that a company will never make a bad decision. Essentially, corporate planning is
giving upper echelon the best available option by eliminating worst alternatives.
The key element that makes a corporate plan more successful and more relative to
rategy. Further, the part of planning regarding the decision-making,
-term direction is
undoubtedly a strategic process. Hence, in recent corporate finance literature the term
strategic management has been the prevalent term expressing the conditions and means
91
See La Porta, R., Lopez-De-Silanes, F., Shleifer, A., and R. W. Vishny, 2000, Agency Problems
and Dividend Policies Around the World, The Journal of Finance, Vol. 55, No. 1, p. 3.
51
92
determines the long- . It involves the use of a number
of models, which monitor and analyze both the internal and external factors (resources
and environment) of the firm, and facilitate in defining the actions to accomplish the plan.
93
:
Firm and environmental analysis

Strategy formulation
Strategy implementation
Evaluation, control and review
By covering each of the above fields, the firm can formulate a plan that corresponds to its
particular strengths and weaknesses, position and the market conditions. Figure 2.1
illustrates how the above elements interact.
Figure 2.1
Elements of the strategic management process
Source: Wheelen, T. L., and J. D. Hunger, 2006, Strategic Management and Business Policy: Concepts and
Cases, 10th edition, Upper Saddle River, New Jersey: Pearson Prentice Hall., p. 11.
Under each step of strategic management planning stands a certain activity or

condition or even another analytical model. More precisely, for the first step, the firm and
92
See Wheelen, T. L., and J. D. Hunger, 2006, Strategic Management and Business Policy:
Concepts and Cases, 10th edition, Upper Saddle River, New Jersey: Pearson Prentice Hall, pp. 3-
5.
93
See Wheelen, T. L., and J. D. Hunger, 2006, op. cit., pp. 10-13.
52
environment analysis, a SWOT analysis94 is employed. Next, under the title strategy
formulation, the mission, the objectives, the strategies and policies are described. The
step regarding the strategy implementation is inextricably linked with programs, budgets
and procedures. Lastly, the step of evaluation, control and review is related to the
Before formulating a strategy it is of great importance for the company to set the
95
and objectives. Many corporations define their mission broadly,
statement communicates the public image of the company to investors, shareholders and
other stakeholders. Thus, it serves as a statement of the current position of the firm and its
outlook for the future96. The objectives of the company are the quantified results of the
97
common objective for many companies. Nevertheless,

objectives can also be non-financial, which can help avoiding the shortsightedness of a
strictly financial approach of objectives.
Another essential element that should also be considered before planning is the
stakeholder analysis. Any change is the operation of the company affects shareholders,
any conflicting expectations of different stakeholders, their power and influence, and help
prioritizing and resolving them by negotiation.
94
SWOT is an acronym for Strength, Weakness, Opportunities and Threats.
95
In many studies, there is a distinction between vision and mission. The first defines the state of
the organization and also provides its broad direction. While, the mission explains how the vision
is to be achieved. See Friend G., and S. Zehle, 2004, Guide to Business Planning, London: The
Economist in association with Profile Books, pp. 27-29. In this study, the use of the term
96
See Wheelen, T. L., and J. D. Hunger, 2006, op. cit., p. 13.
97
An optimal method to set the objectives is by considering the following points: to be specific,
measurable, achievable within the stated time frame, relevant in the context of the vision (or
mission) and to be time bounded. In other words, objectives should be SMART. See Friend G.,
and S. Zehle, 2004, op. cit., pp. 27-29.
53
A comprehensive view on the planning process is presented in figure 2.2. The
illustrated strategic planning process utilizes a number of analyses in connection with the
external and internal factors.
Figure 2.2
The strategic planning process
Source: Friend G., and S. Zehle, 2004, Guide to Business Planning, London: The Economist in association
with Profile Books, p. 26.
54
Consistent with the mission and the objectives of the company while formulating
the strategy is the overall organization structure. The structure of the company can be a
source of competitive advantage98 and also a decisive factor for the performance of the
firm. By paraphrasing Fama and Jensen (1983), it can be noted that the scope and
complexity of the production process of a firm determines the way it is organized 99. The
reveals the chain of command, the responsibilities and
powers of each department, the lines of reporting and information flow, the span of
100
an organization should adapt to environmental contingencies by altering its
101
. Listed companies and going public companies as well have to
develop codes of practice and certain governance structures or organizational forms,
which respond to institutional forces. Certo (2003) among other researchers suggests that
organizational legitimacy is paramount for firm performance and survival. Undertaking
an IPO requires the adoption of prevailing practices and procedures, which lead firms to
resemble other organizations facing the same set of environmental circumstances. This
legitimacy may signal the quality of the firm at the time of the IPO.
Elaborating on public companies are usually

headed by a Chief Executive Officer (CEO), a Chief Financial Officer (CFO) and a
general counsel. Of course, depending on the industry and the size of the company there
can be a Chief Information Officer (CIO), a Chief Technology Officer (CTO) and a Chief
Operations Officer (COO). There are three basic types of organizational structures102 that
their combinations originate new hybrid structures. The functional structure illustrated in
figure 2.3, is a simple structure which divides the business along the main value chain
98
A source of competitive advantage can be found when an organization is optimized for a
particular business. See Kay, J., 1993, Foundations of corporate success: How business strategies
add value, Oxford University Press.
99
See Fama, E. F., and M. C. Jensen, 1983, Separation of Ownership and Control, Journal of Law
and Economics, Vol. 26, No. 2, p. 302.
100
The structural contingency theory indicates which structure is required for the organization to
operate most effectively by indentifying a set of contingency factors. See Donaldson, L., 1995,
American anti-management theories of organization: A critique of paradigm proliferation,
Cambridge University Press.
101
See Burton, P., 2000, Antecedents and Consequences of Corporate Governance Structures,
Corporate Governance, Vol. 8, No. 3, p. 195.
102
If the simple structure e.g. owner-worker is excluded.
55
activities with each reporting to the top management. It is appropriate for medium-sized
companies with several product lines in one industry103. The advantage of this structure
lies in its concentration and specialization in one industry. However, it would be insipid
for a company to continue operate under circumstances when it tries to diversify its
product.
Figure 2.3
The functional structure
The next type of structure, the divisional, is more complex than the previous,
suitable for larger companies. In this organizational structure the divisions represent
strategic business units, which can have a great diversity regarding their product or
services. From figure 2.4 can be noticed that the support functions (finance, human
resources, etc.) are located at head office level. Management uses horizontal linkages in
Further, this organizational
structure has a high level of decentralization. The advantage of this structure is its
104
tends to become inflexible due to its size and complexity.
103
See Wheelen, T. L., and J. D. Hunger, 2006, op. cit., p. 222.
104
See ibid., p. 223.
56
Figure 2.4
Divisional structure
The third structure is a combination of elements from the previous two types. The
matrix structure is product-oriented with the primary and support functions to be shared
among several products. This type of structure is also suitable for large companies,
appearing to be complex and highly decentralized as well. Matrix structure is illustrated
in figure 2.5. Matrix structure was developed to combine the stability of the functional
structure with the flexibility of the product form (Wheelen and Hunger, 2006).
Additionally, this structure is considered very useful when the external environment
exhibits high complexity and uncertainty level. However, it has like every other structure
certain downsides. It produces conflicts regarding duties, authority and resource
allocation between functional and divisional managers, leading to battles for power.
Avoiding such conflicts can be managed by setting specific goals and introducing new
practical and comprehensible technologies.
57
Figure 2.5
Matrix structure
The organizational structure of a company is an essential factor for the

preparation of an IPO and the thereafter performance of the firm. In addition, considering
the Sarbanes-Oxley Act of 2002 provisions that require transparency and the
operation105, the proper definition of the organizational structure can alleviate agency
responsibilities, accountability and power stem from organizational structure.

Consequently, top management position in the firm can influence the strategic process.
106
, who
is responsible for conceiving and imposing the implementation of the strategic plan to the
105
See Johnston, J., and J. Madura, 2009, The Pricing of IPOs Post-Sarbanes-Oxley, The
Financial Review, Vol. 44, No. 2, p. 293.
106
See Andersen, T. J., 2000, Strategic Planning, Autonomous Actions and Corporate
Performance, Long Range Planning, Vol. 33, No. 2, p. 186.
58
organization107
setting long- or medium- term objectives and formulating the appropriate strategies in
view of objectives requires the participation of top management.
Top management uses a variety of product/portfolio analysis tools, which allow
and its resources. The most commonly used analysis is the analysis of strengths,
weaknesses, opportunities and threats (SWOT) (in Figure 2.6), which brings together
three separate types of analysis, namely, firm analysis (internal), environmental analysis
(external) and portfolio analysis. The main benefit of SWOT analysis lies in the fact that
management attains an overview of the firm in the context of opportunities and threats.
Further, SWOT analysis has the advantage that can be done quickly and it can be easily
understood and communicated. It can stimulate managers to discuss and to think in a way
that is not too restrictive.
competitive advantages, using two approaches. The first is regarding to the strengths and
weaknesses, which can be highlighted by the firm analysis. Therefore, evaluation
elements like VRIO108, resource audit, value chain and others are employed. Strengths
can be important only if they can be used to pursuit an opportunity or counter a threat. In
a similar way the identification of a weakness can be done, considering whether or not it
is related to a threat. The second approach refers to the opportunities and threats that the
environment in which the company operates, contains. To this end, the environmental
analysis involves a PEST analysis109 combined with the industry and competitor analyses
Opportunities and threats are closely related with the changes in the environment and
should be considered in the context of strengths and weaknesses.
107
See idem.
108
The acronym VRIO stands for Valuable, Rare Imitable and Organization. For more
information on VRIO analysis see Friend G., and S. Zehle, 2004, op. cit., p. 43.
109
PEST stands for the evaluation of Political, Economical, Social and Technological factors.
See Friend G., and S. Zehle, 2004, op. cit., pp. 32-35.
59
Figure 2.6
SWOT analysis
By employing such analysis the top management obtains a total perspective of the
issues affecting the firm and the market, and a basis in order to develop their strategies,
while the planning process becomes more realistic and plausible. Lastly, SWOT analysis
seems to be helpful enough in cases of equity financing by considering additional factors
such as the allocation of new shares and its implication for the ownership and control, the
resources. It is essential for a financial plan of a company contemplating an IPO to

include a SWOT analysis, which will facilitate the adjustment of the company in the new
environment by setting forth its competitive advantages.
2.1.1 PLANNING GUIDANCE FOR AN IPO.
An IPO is a very intense and time consuming process, which requires the maximum
60
introduction of new committees, and the enhancement of the operation standards.
The first concern of an issuing company is the development of an impressive and

professional management team, because it will send the right signals to the prospective
underwriters. It is self-evident that a capable CEO and/or CFO will be more useful during
the meetings with the analysts of the underwriters, allowing the smooth operation of the
firm. Additionally, the firm should have a strong management team with experienced key
employees. Therefore, a management evaluation before setting course to IPO would be
well-advised.
Further changes introduced for the IPO process can be applied at organizational
level. The company should incorporate in its structure auditing and remuneration
committees, composed from independent directors. The audit committee should include
auditors and determine their compensation while approving all the services performed by
them. The independence of this committee is essential for the function of the financial
reporting processes. The remuneration committee is responsible for overseeing the
independent directors the level of compensation for the CEO and the senior management.
In addition the company should develop compensation packages in order to attract, retain
or motivate its key employees. In other words compensation packages are used as a mean
to keep the interests of management in line with the shareholders110.
Before going public, the firm should develop a strategy based on the
maximization of earnings. Investors are interested in a firm that could maintain a high
level of earnings in the post-IPO period. The firm should show earnings for at least two
or three fiscal years prior of the IPO effective date. In addition, a firm which shows high
earnings level has access to more underwriters and can reduce the percentage of the
company sold in the IPO.
110
Compensation packages may include equity incentives like stock options, stock appreciation
rights, restricted stock bonus or even phantom stock plans.
61
Lastly, the issuing firm should upgrade its internal accounting system so that can
satisfy the extensive disclosure and control requirements of S.E.C. In many cases, IPOs
are delayed, because of the inability of the firm to provide audited financial statements
with the use of IPO-acceptable accounting principles.
Letting aside the legislative and financial requirements of an IPO, the most
important element that must be satisfied by the issuing firm is the assurance of the
management quality. The top management capabilities are determinant of the
performance of the firm in the pre- and post- IPO period.
2.2 MANAGEMENT QUALITY AND IPO PERFORMANCE.
A common practice and concern as well among private firms111 preparing for an IPO is
the restructuring of the top management team in order to convince potential investors of
, 2002; Higgins and Gulati, 2006). A skillful and
outsiders and at the same time reduce the informational asymmetry that the firm faces in
the equity market (Chemmanur and Paeglis, 2005). Further, Higgins and Gulati (2006)
Nevertheless, the factors that lead to the restructuring of top management during
the pre-IPO period, affecting its quality and reputation must be equally considered. Li
(2008) found that the top management team tenure, the top management founder
percentage and its functional heterogeneity are three major factors determining the
management restructuring in the pre-
contrast with agency theory (Jensen and Meckling, 1976), shows that the three
aforementioned management characteristics are all negatively associated with the extent
of pre-IPO management restructuring. Moreover, the results regarding the top
management tenure showed that long-tenured teams have a high level of structural and
expert power within the pre-IPO firm, lowering the risk of restructuring. The level of
111
Particularly, concerns firms that are backed by venture capitalists.
62
founder ownership in the management team is negative associated with management
restructuring due to the fact that certain central positions are assumed by the founders.
- rd attribute of
the management team, the heterogeneity, is desirable for a firm going public, because a
functional heterogeneous team is more likely to address the new problems arising from
this process. Additionally, Li (2008) stresses that the effects of the three management
team characteristics on the firm depend on the operation context of the firm and its
growth rate. This study offers a different perspective on the elements that drive firms to
change their management structure. Altering the structure of management may entail
great implications to its quality.
In context of strategic planning, the relationship between the quality and
impact of top management team on the I

for the academic literature.
and IPO performance belongs to Chemmanur and Paeglis (2005). They examine the
relationship between the
aspects of the pre- and post- IPO performance, reaching an interesting conclusion in
and the post IPO firm performance. Chemmanur and Paeglis (2005) found that firms with
better and more reputable managers have larger IPO offer sizes. Further, they note that
firms of higher management quality and reputation are more likely to associate with more
reputable underwriters (also positive relationship). Furthermore, they document a
the level of underpricing in its IPO, as a consequence of the reduction of information

asymmetry (Rock, 1986). Thus, this reduction can be further associated with the one in
management quality and reputation112. Additionally, a firm with high management
112
This relationship is consistent with the notion that the costs to acquire and transmit to market
information incurred by the underwriters will be lower for firms with higher management quality
63
quality can attract more institutional investors, which is also consistent with the
document is among management quality and reputation and the post-IPO long-term stock
returns, which they found to be positive and consistent with the notion that the
heterogeneous expectations among investors in an environment of costly short-selling is
the main cause of long-term underperformance of IPOs.
The management quality and reputation are important elements of the transition to
public ownership and therefore requires special attention. The planning of an IPO should
commence with the management restructuring, because of the profound benefits that it
has on the underwriter selection, the IPO marketing and the latter performance of the
firm.
2.3 MANAGEMENT AND HOSTILE TAKEOVER DEFENSES OF IPO FIRMS.
Hostile113 takeovers have long been a salient feature of the corporate world, which may
ntial of
114
prime reason for such situation. Nevertheless, management alone cannot be responsible
f
composition of board of directors, the equity ownership of insiders and outsiders as well
as poor corporate performance can also constitute reasons for a potential hostile
takeover115. When a hostile takeover takes place, a third company acquires the
and reputation. See Chemmanur, T. J., and I. Paeglis, 2005, Management Quality, Certification,
and Initial Public Offerings, Journal of Financial Economics, Vol. 76, No. 2, p. 366.
113
to the
shareholders to accept the offer whether the board has made any recommendation or not.
114
See Ehrhardt, M. C., and E. F. Brigham, 2009, Corporate Finance: A Focused Approach, 3rd
Ed., Cengage Learning Publishing, p. 454.
115
See Shivdasani, A., 1993, Board Composition, Ownership Structure, and Hostile Takeovers,
Journal of Accounting and Economics, Vol. 16, No. 1-3, pp. 168-169 and Weisbach, M. S., 1993,
Corporate Governance and Hostile Takeovers, Journal of Accounting and Economics, Vol. 16,
No. 1-3, pp. 200-201.
64
underperforming firm, initiating a series of changes in all respects. Hostile takeovers
differ from other takeovers, which can be used from managerial side to keep the
managers in
of directors. However, the danger of a raider gaining control over the firm from
uncoordinated shareholders is still present.
In the 1980s a phenomenal volume of hostile takeovers was recorded, reaching its
climax in 1988-1989. Since then, hostile takeover activity has been decreased, due to the
measures (antitakeover laws) taken by states and, more significantly, the adoption of
takeover defenses by the firms. Takeover defenses take many forms and can be integrated
can be divided into two groups, those which make it difficult for the raider to acquire
control and those which aim in diluting
Every company, private or public is in need of a defense policy against hostile

takeovers. Especially, according to Easterbrook and Fischel (1991), those firms that go
iability of such
firms depends on the antitakeover measures that they deploy and on the time as well that
they are deployed116.
The most known takeover defenses appropriate for companies that are amidst an
IPO are the staggered boards, the supermajority voting provision, the fair price clauses,
the poison pills and the most controversial defense of all the greenmail117. Specifically, a
staggered board defense is a provision in the corporate charter, which concedes the right
of reelection in a given year only to a fraction of members rather than all directors, so that
the acquirement of full control by a successful raider can take more time118. The next
commonly used defense is the supermajority voting provision, which force the raider to
116
Takeover defenses can be deployed either during the IPO or after the IPO. Easterbrook, F. H.,
and D. R. Fischel, 1991, The Economic Structure of Corporate Law, Cambridge: Harvard
University Press, argue that managers acquire their takeover defenses after the IPO, because they
lower the firm value.
117
Few other takeover defenses are the differential voting rights, the dual-class recapitalizations,
the scorched-earth policies, litigation practices and the white knight practice. For more
information, see Tirole, J., 2006, The Theory of Corporate Finance, New Jersey: Princeton
University Press, pp. 425-442.
118
See Tirole, J., 2006, op. cit., p. 45-47.
65
acquire 80 or 90% of the votes in order to effect a merger or another significant corporate
reorganization119. The fair price clauses are provisions that force the acquirer to offer a
premium for all shares by imposing a very stringent supermajority clause, unless a
higher120 and uniform price is offered for all shares121. The poison pill practice also
known as shareholder rights provision, gives the shareholders the right to buy a specified
number of shares in their company at a very low price if a specified percentage of the
k is acquired by a raider122. The last commonly used defense practice is the
greenmail or targeted block stock repurchases. The management uses the corporate
123
. Greenmail is
considered as controversial, because the management and the raider collude at the
expense of the shareholders.
Field and Karpoff (2002) argue that firms deploy their takeover defenses when
they go public by selecting longer term defensive postures. Further, they argue that IPO
and Karpoff (2002) support the view of Brennan and Franks (1997), stressing that
managers try to ensure the continuation of their personal control benefits during the IPO,
insulating themselves from the market. Moreover, in their research Field and Karpoff find
that the probability for an IPO firm to have a takeover defense is positively related to
rial ownership and
measures of monitoring from non-managerial shareholders. Additionally, they point that
the likelihood of a takeover defense depends on the benefits that managers have from
their positions. Managers also appear to shift the cost of takeover defenses on non-
managerial shareholders, if that is possible.
The protection of IPO firms against hostile takeovers brings into light an issue
that is related to the agency theory and the governance of the firm. The separation of
management and ownership can be considered as an additional cost to the firm. The study
119
See idem.
120
121
See idem.
122
See Ehrhardt, M. C., and E. F. Brigham, 2009, op. cit., p. 455.
123
66
of corporate governance structure can help to understand how these agency costs arise
and how they can be mitigated.
67
CHAPTER 3
Corporate Governance and the Initial Public Offerings
3.1 CORPORATE GOVERNANCE AND ISSUING COMPANIES.
The recent financial crisis has brought once again124 the issue of good corporate
governance back to centre stage. Public and private companies recognize even more the
contribution of corporate governance to their financial performance and realize the
necessity for this aspect of value-based management125 regarding their decision making,
the managerial accountability and the access to external funds.
liers of finance
126
. It refers to
to return funds to outside investors (shareholders), maximizing the wealth of the latter
and therefore attracting external financing. Nevertheless, this definition reflects a narrow
127
in the
account. A concise and thorough definition of corporate governance is given by Ho

ses among the board of directors,
shareholders, top management and other stakeholders, and involves the roles of the
stewardship process and exercising strategic leadership, and the objectives of assuring
128
.
124
The economic events in Asian markets in 1998, the dotcom bubble in 2001 and 2002 and the
accounting scandals responsible for poor performance of companies had previously revealed
many shortcomings in the governance of companies.
125
Value-
op. cit.,
p. 463.
126
See Shleifer, A., and R. W. Vishny, 1997, A Survey of Corporate Governance, Journal of
Finance, Vol. 52, No.2, p. 737.
127
See Tirole, J., 2006, op. cit., p. 16.
128
See Ho, C. K., 2005, Corporate Governance and Corporate Competitiveness: An International
Analysis, Corporate Governance: An International Review, Vol. 13, No. 2, p. 212.
68
In essence, corporate governance is a mechanism, which separates ownership and
control129 of the corporation. The separation of those two main functions has led the
corporate insiders (e.g. managers) to misbehavior, and has brought conflicts with the
shareholders u
130
. This problem of corporate governance is
insufficient effort, b) extravagant investments, c) entrenchment strategies and d) self-

dealing131. Therefore, shareholders in order to make sure that the management is working
132
and the
mechanisms link the performance of the company with compensation contracts,
motivation of management with such incentives should be carefully planned and used,
long-term performance over the short-term. Additional, control mechanisms that have
been devised to mitigate conflicts, include board structures, antitakeover provisions,
ownership structures, and takeovers.
However, it is important to underline that the dysfunction of corporate governance

is not related exclusively on the managerial behavior. There are additional factors in
terms of practices and procedures in the company that have a profound impact in its
governance. The lack of transparency exacerbates the relationship of investors and
management, because the former are imperfectly informed about the compensation of the
latter. Further, the limited transparency of managerial stock options is also a conflict
point133. Moreover, the compensation packages such as salary and bonuses of the top
management can reach very so high levels that can no longer be considered as
perfo
provision. The link between performance and compensation is important in aspect of
129
Or management and finance accordingly.
130
131
See idem.
132
Shareholders may attempt or threat management with a friendly takeover.
133
For more information see Tirole, J., 2006, op. cit., p. 18.
69
promoting the investors best interests. Lastly, another practice that causes corporate
governance to dysfunction is the accounting manipulation, which can inflate the
mainly related to the achievement of performance goals or the concealment of poor

performance. However, it is worthy to note that these manipulations are committed in
order to avoid violating bank covenants, and to enable the financing continuation.
viewed as an
essential mechanism which will sa
investor confidence, provide greater access to funds and reduce potential risks associated
134
with fraud . In addition, it should protect the interests of the owners and reconcile
them with those of management and other stakeholders through the appropriate board
structure and processes135. The assurance of good corporate governance practices has
been among the priorities of states with developed economies. Laws and guidelines are
established by governments that regulate the function mostly- of public companies,
aiming to the protection of the investors.
The Sarbanes-Oxley Act of 2002 in the U.S. is typical example of the importance
calls the
companies to disclose financial information, to establish a system of financial controls, to
monitor and audit their systems. Specifically, the 404 section of the act provides that the
tions in periodic filing
with S.E.C. regarding the evaluation of the effectiveness of its internal controls over
financial reporting136. Thus, the act requires a certification that the financial statements
are accurate by the CEO and the CFO. The board of directors should be truly independent
with at least one of its member to have a financial background and another one to chair
the audit committee. Moreover, the establishment of an independent audit committee
constituted of at least one financial expert as a member is imperative. The act also
134
Process: A Note, Corporate Governance: An International Review, Vol. 12, No.3, p. 353.
135
See Ho, C. K., 2005, loc. cit., p. 213.
136
For more information, see Section 404 of Sarbanes-Oxley Act 2002 available at
http://www.soxtoolkit.com/ and PricewaterhouseCoopers, 2004, loc. cit., p. 13.
70
-audit, including but not
limited to services such as internal audit, legal and valuation services. Nevertheless, there
are services like tax and general advisory services that can be allowed after the approval
of the auditing committee. Specifically, regarding the corporate structure, the act requires
that the majority of the board of directors should be composed from independent
directors (outsiders)137. Lastly, it is required a code of ethics to be implemented by the
senior financial officers.
Additional rules on corporate governance are imposed by the stock exchanges,

which overlap many of the aforementioned rules. For example U.S. companies listed on
NYSE, it is required additionally to have an independent compensation and a
nominating/corporate governance committee138. Thus, companies must generally obtain
shareholder approval in respect to any equity compensation plan.
For a private company that is about to go public, it is self-evident that should

make fundamental internal changes to the way it operates. The corporate governance
rules and practices imposed have an impact to the dispersion of ownership, affecting the
structure of the company, to the size, role and the liabilities of the board of directors, and
add a number of committees that establish internal controls and communication
procedures. Hence, the companies contemplating an IPO change the corporate
governance model to this new environment.
There is a wide range of corporate governance models in the world, each serving
a different purpose and offering distinctive competitive advantages; U.S. companies
employ a liberal approach of corporate governance. The U.S. corporate governance
model provides that the corporation is governed by a board of directors, which chooses
the chief executive officer (CEO). The CEO is responsible for managing the corporation
with the permission of the board. In the liberal model, however, the board is the main
instrument of c
performance, defines the corporate strategy, and approves major business decisions.
137
Companies qualified as control companies (e.g. the Ja
this requirement.
138
This committee is responsible for nominating candidates (e.g. directors) for office in the
organization.
71
Corporate performance has been closely related by theoretical and empirical
studies with corporate governance on different levels, though the results do not lead to a
solid conclusion. The inconclusive evidences, which are related to various aspects of the
relationship between corporate governance and performance, can be rendered to the fact
that corporate governance variables are endogenous. Subjective factors, such as
management, affect different processes that take place inside the firm and, therefore,
a decision made by the directors, as well as a factor that potentially affects the choice of
directors. Consequently, the way of approaching the corporate governance variables can
have an impact on the evidence.
3.2 CORPORATE GOVERNANCE STRUCTURE, PERFORMANCE AND VALUE

OF IPO FIRMS.
Aspects of corporate governance have been linked by many studies139 with a number of
issues related to the evaluation of the firm. The consideration that corporate governance
correlates with the value of a firm as well as its performance is consistent with the theory
of going public. Barney (2001) stresses that broad corporate governance factors may be a
source of competitive advantage. Companies that issue shares via an IPO experience a
major change in their corporate governance mechanisms, particularly regarding their
internal mechanisms. Field and Sheehan (2004) note that a firm doing an IPO is in the
best position to determine their ownership structure. During the time of the IPO as well as
afterwards140, the changes in corporate governance mechanisms can either be a) on board
of directors structure, size (Yermack, 1996), composition and leadership structure
(Jensen, 1993), and/or b) on ownership structure (type of ownership and variation of
139
See e.g. Burton et al., 2004; Bruton et al., 2010; Balatbat et al., 2004; Boulton et al., 2010;
Price et al., 2011.
140
Depending on the research approach, the relationship between IPO performance and corporate
governance mechanisms can be two fold. It can be either static (at the time of the IPO or short-
term performance) or dynamic (for long-term The Effects
of Corporate Governance Mechanisms on Post-IPO Performance: Empirical Evidence from an
Emerging Market, Istanbul Stock Exchange (ISE), Working Paper, Maltepe University, p. 4.
72
ownership141) (Chahine, 2004). Nevertheless, it must be underlined that ownership
structure is a determinant factor
should design the sales of new shares with the final ownership structure in mind before
the IPO (Mello and Parsons, 1998).
and value sets off by the role that the board of directors must fulfill. The board is
considered as the heart of corporate governance. It acts as the central internal control
mechanism, monitoring the management on behalf of shareholders. Thus, the quality of
perspective, Zald (1969) reiterates the role of board as control mechanism, finding that
142
. He notices that the
establishment of such mechanism sends signals to equity owners and potential owners
are Filatotchev and Bishop (2002), arguing that board characteristics may signal outside
investors that the company has an efficient corporate governance system. Thus, they
underline that in such way the firm can differentiate its IPO from others.
y the
number of the board members. Zahra and Pearce (1989) argue that there is a positive
relationship between size and effectiveness. They suggest that the larger the board is the
more difficult is for the CEO to dominate the board. In other words, a large board secures
its independence and avoids a managerial entrenchment. Contrariwise, Yermack (1996)
finds a negative relationship between board size and firm value by drawing evidence
from a sample of 452 large U.S. firms. Hermalin and Weisbach (2003) argue that larger
boards become ineffective due to less participation in the decision making process and
more free-riding efforts of directors. In spite of those perspectives, Jensen (1993)
141
The levels of managerial stock ownership and the extent of block holder stock ownership.
142
See Zald, M. N., 1969, The power and functions of boards of directors: A theoretical synthesis,
American Journal of Sociology, Vol. 75, No. 1, pp. 97-111.
73
suggests that an optimal board size exists, and recommends limiting it to seven or eight
members.
The firm performance and value may also be influenced by the composition and
the particular characteristics of the board. Agency theory provides that a conflict of
interest among ownership and control exists, implying an additional cost. The reduction
of such cost can be achieved by appointing executive and non-executive directors in the
board143. The latter are usually appointed by shareholders to monitor and control
managers. Fama and Jensen (1983) argue that the firm will avail from the mixed board
composition in terms of the competencies and good knowledge of the executive directors
and the participation of non-
ve correlation
between the proportion of independent directors and the accounting measures of
composition has been noticed as well by Rosenstein and Wyatt (1990), when they
correlated a small increase in stock price with the addition of an outside director to the
board. However, Baysinger and Hoskisson (1990) believe that outside directors intervene
on multiple boards, while they may not effectively understand the business. In addition,
Hermalin and Weisbach (1991) and Bhagat and Black (2001) argue that a higher
percentage of independent directors on the board does not have a significant impact on
A key attribute of board that can be

ownership of its members. Demsetz and Lehn (1985) found that ownership concentration
is not associated with the firm performance or value. However, a high concentration of
ownership may lead to a lower proportion of outside directors and a unitary leadership
structure (Beatty and Zajac, 1994). This conclusion is drawn from the assumption that
board members with low equity ownership have the incentive to monitor managers who
fail to maximize their wealth. Hence, the relationship between board equity ownership
143
See Chahine, S., 2004, Corporate Governance and Firm Value for Small and Medium Sized
IPOs, Financial Markets and Portfolio Management, Vol. 18, No. 2, p. 145.
74
and the level of firm monitoring is negative144. Thus, at higher levels of ownership the
relationship between firm value and ownership concentration becomes negative, rendered
to the management entrenchment (Morck et al., 1988). Additionally, a negative impact of
ownership concentration on board independence is noticed by Setia-Atmaja (2009).
Closely associated with the high board equity ownership is the concept of the
145
, which may also lead to family interest protection or managerial
chairmanship and CEO role may have positive effects on the firm performance. Rechner
and Dalton (1991) found that firms opting for independent leadership have consistently
outperformed those that relied upon duality.
146
. The
ownership of a firm can mainly take five forms: institutional, individual, corporate, state
and family (Gedaljovic and Shapiro, 1998). Moreover, the type of ownership structure in
accordance with the type of involvement that satisfies the needs expressed by the
ownership determines the role of the governing body147. Jensen and Meckling (1976)
colligate the agency problem and the ownership structure. Relying on the divergence of
interest between owner- to the
dispersion of ownership structure. In many public or issuing companies there is a large
amount of equity retain by family members. Family ownership and relationships as well
in the firm have an effect on its performance. McConaughy, Metthews and Fialko (2001)
support th
performance. In addition, they noticed a positive relationship between family ownership
and the performance of firms in America. Hence, firms controlled by founding family
144
See Beatty, R. P., and E. J. Zajac, 1994 Managerial Incentives, Monitoring and Risk Bearing:
A Study of Executive Compensation, Ownership and Board Structure in Initial Public Offerings,
Administrative Science Quarterly, Vol. 39, No. 2, pp. 320-333.
145
CEO and chairperson. See Baliga, B. R., Moyer, R. C., and R. S. Rao, 1996, CEO Duality and
Strategic Management Journal, Vol. 17, No. 1, pp. 41-53.
146
See Stoughton, N., and J. Zechner, 1998, IPO-Mechanisms, Monitoring and Ownership
Structure, Journal of Financial Economics, Vol. 49, No. 1, p. 47.
147
See Giovannini, R., 2010, Corporate Governance, Family Ownership and Performance,
Journal of Management and Governance, Vol. 14, No. 2, p. 147.
75
have greater value and can operate more efficiently. In contrast, Shleifer and Vishny
(1997) argue that in a firm controlled by family, there may be a tendency to favor family
shareholders at expense of public investors. Claessens, Djankov and Lang (2000) agree
with Shleifer and Vishny (1997), noting that when a relationship among managers and
family shareholders exists, there is a risk of a non-professional managerial approach,
attempting to secure the interests of the family.
Related to the value of the firm, there are two more ownership attributes that
should be approached: a) the level of equity that belongs to management and b) the
blockholder148 equity. The level of management equity ownership increases the value of
the firm by lowering agency costs, because upper management with high percentage of
shares in aspect of maximizing its own wealth will align interests with
owners/shareholders (Jensen and Meckling, 1976). Aggarwal and Klapper (2003) point
out that firms offer Equity Stock Ownership Plans (ESOPs)149 as an incentive to
managers to act more on behalf of shareholders. Notwithstanding, the ESOPs seem to
motivate employees only for a limited period, because they sell the stock as soon as they
exercise their options150. On the other hand, Stulz (1988) presents a very interesting
relationship between firm value and managerial ownership. He describes the above
relationship as curvilinear; arguing that the value of a firm may eventually decrease as
managers become more dominant in the ownership. In essence, the convergence of
interests hypothesis
information and increases the offer price-to-
entrenchment hypothesis suggests the opposite151. However, Gugler (1999) in his study
of U.S. and U.K. firms found that the owner-controlled firms outperformed significantly
the manager-controlled firms.
148
According to Aggarwal, R., and L. Klapper, 2003, Ownership Structure and Initial Public
Offerings, Policy Research Working Paper, Series 3103, The World Bank, p. 9, blockholders are
defined as any shareholder owning five percent or more of the stock, though with an upper limit
of 10 and 15 percent.
149
Equity Stock Option Plans or ESOPs are option plans that give stock to key managers and
executives of the firm in order to motivate them. For a critique on ESOPs, see Ehrhardt, M. C.,
and E. F. Brigham, 2009, op. cit., p. 458.
150
See idem.
151
See Chahine, S., 2004, loc. cit., p. 146.
76
The blockholder equity as an
Kusnadi (2005). They found that blockholder ownership has a positive effect on firm
value in a sample of Singapore and Malaysian firms. This hypothesis was propounded by
Shleifer and Vishny (1986), arguing that blockholder ownership increases efficiency as
they have more incentive to efficiently monitor managers. It should be stressed also that
ownership concentration of blockholdership, the executive compensation and the board

[2008]). Of course, in case of high
blockholder ownership it is likely that the incentives of an entrenchment would increase.
Lastly, an additional relationship between corporate governance and firm value is tested
by Aggarwal and Klapper (2003). Their findings suggest that venture capitalist ownership
is positively associated with corporate governance and performance. When venture
capitalists are shareholders, according to Baker and Gompers (2003), they provide
financial instruments, inside board members as well as other value-added services.
During their preparation to go public, firms realign their ownership and corporate
152
governance structure, which impacts o . Changes set
forth prior to the IPO, affect the proportion and allocation of the shares offered to the
public, the marketing process and the underpricing levels, the subsequent ownership and
the adjustment of the firm to the new environment.
3.3 IPO UNDERPRICING AND CORPORATE GOVERNANCE STRUCTURE.
In corporate finance, there is a notable interaction between corporate governance

structure and the phenomenon of IPO underpricing. Underpricing can be considered as a
mechanism to influence the post-IPO ownership structure of the firm. Nevertheless,
empirical evidence shows that relationship is not always significant and therefore it is
criticized.
152
Namely, impacts on the IPO and the long term performance.
77
There are two fundamental theories that examine the above interaction, belonging
to Brennan and Franks (1997), and Stoughton and Zechner (1998). Both studies proceed
from a common hypothesis, suggesting that the issuers and underwriters use underpricing
to solicit oversubscription and thereby allocate shares to preferred investors, forming
their advised ownership structure. However, they use different arguments about the
interaction that underpricing has on ownership structure.
Brennan and Franks (1997) suggest that the role of underpricing is to help insiders
retain control and reduce the probability of hostile takeovers. They find that the
discrimination in the allocation of shares should favor small applicants, because of the
non-pecuniary benefits of control
is negatively related to the size of large blocks assembled after the IPO, which is
consistent with underpricing being an effective mechanism to secure a diffuse outside
153
.
On contrary, Stoughton and Zechner (1998) found that strategic rationing is

positively correlated with underpricing154
rationing in favor of large
155
. Alternatively, the
reason why large investors were preferred rests on the fact that in a concentrated
ownership structure they have incentives to monitor the managers and help maximize the
are of lesser importance and where the benefit-to-cost ratio of monitoring is high. The
following table 3.1 shows the different arguments of the above theories.
153
See Brennan, M. J., and J. Franks, 1997, Underpricing, Ownership and Control in Initial
Public Offerings of Equity Securities in the U.K., Journal of Financial Economics, Vol. 45, No.
3, p. 412.
154
The same relationship is also true in a regulated environment. See Stoughton, N., and J.
Zechner, 1998, IPO-Mechanisms, Monitoring and Ownership Structure, Journal of Financial
Economics, Vol. 49, No. 1, p. 75.
155
See Stoughton, N., and J. Zechner, 1998, loc. cit., p. 48.
78
Table 3.1
Relations between underpricing and ownership structure according to Brennan and

Franks (1997) and Stoughton and Zechner (1998)
Possible relations between underpricing and ownership structure
Hypothesis Ownership dispersion measures
Total # of Blockholder # of non-block

shareholders ownership institutional
shareholders
Brennan and Franks (1997) Positive Negative Positive
Stoughton and Zechner (1998) Negative Positive Negative
Source: Zheng, S. X., and M. Li, 2008, Underpricing, Ownership Dispersion, and Aftermarket Liquidity of
IPO Stocks, Journal of Empirical Finance, Vol.15, No. 3, p. 439.
Opposing to the existence of a relation between underpricing and ownership

structure, stands a number of recent studies, showing that no significant evidence is found
to support it.
Field and Sheehan (2004) undertake a study, analyzing whether there is any
relation between underpricing and the subsequent to IPO outside block ownership of the
-1992,
their research revealed that underpricing has little or no effect on outside block
ownership. Additionally, they show that 83% of all firms have an outside blockholder in
place even before going public. Lastly, they point that underpricing goes in the direction
that Brennan and Franks (1997) suggested.
Consistent with the findings of the previous study is the research of Hill (2006),
which employs data related to shareholdings of firms listed on the London Stock
Exchange (LSE). She found evidence that IPO underpricing does not play a significant
role in determining the proportion of block holdings in the share ownership structure of
the firm, either at the IPO or long-term.
79
However, Zheng and Li (2008) in their paper examined three hypotheses: how
does underpricing affect post-IPO ownership structure, whether dispersed ownership
improve aftermarket liquidity for IPO stocks, and whether underpricing has any direct
effect on the IPO aftermarket liquidity after controlling for ownership dispersion. To that
end, they used a sample of 1179 NASDAQ IPOs from 1993 to 2000. They found that
underpricing is negatively related to changes in the total number of shareholders, though
it is positively related to the number of non-block institutional shareholders after the IPO.
Further, they interpret their evidence as an intentionally underpricing used to attract non-
block institutional shareholders. Notwithstanding, they underline that their findings
cannot provide a strong support for Stoughton and Zechner (1998) hypothesis, because
they do not find any significant relation between underpricing and the change in
blockholder ownership.
Lastly, an interesting study on underpricing worthy of noticing belongs to

Boulton, Smart and Zutter (2010). They study, how differences in country-level
governance affect IPO underpricing. After examining a sample of 4462 firms in 29
countries for the period of 2000-2004, they concluded that underpricing is higher in
countries where corporate governance protects more investors than insiders156. Their
results are consistent with Zingales (1995), Brennan and Franks (1997) and others as
well, that hypothesize IPO to be used to disperse outside ownership structure.
Specifically, they found that underpricing has a negative association with post-IPO
outside blockholdings and a positive association with private control benefits. A
dispersed outside ownership structure facilitates managerial entrenchment; hence, in
connection with country governance mechanisms the need for a dispersed outside
ownership increases, when strong investor protections are present.
156
2010, IPO Underpricing and International Corporate Governance, Journal of International

Business Studies, Vol. 41, No. 2, p. 219.
80
3.4 CORPORATE GOVERNANCE, FIRM PERFORMANCE AND DIVIDEND
POLICY.
Studying upon the factors that influence the corporate governance mechanisms, one can
come across the impact of dividend policy on the firm governance. Dividends can be of
particular interest in unraveling the effects that external and internal corporate
g
working properly.
The idea of using the dividends as a signal of future profitability of the firm has
been proposed and supported with empirical evidence by many economists. La Porta et
al. (2000) have examined the role of dividend policy in context of agency theory, under
the premise that dividend policies address agency problems between corporate insiders
and outside shareholders. They first distinguish two alternative agency models of
n test those
protection of the minority shareholders, which enables them to extract dividend payments
siders considering a
future equity issue pay dividends to establish a reputation for decent treatment of the
minority shareholders157. In this model dividends are a substitute for effective legal
protection158. According to the first model, the dividends paid to minority shareholders
will be higher in fast growth firms of countries with better protection of such
shareholders. Contrariwise, the second model predicts the opposite.
In his study, Setia-Atmaja (2009), approaches dividend policy in conjunction with

corporate governance, stressing that dividend policy can assist dispersed (or minority)
shareholders in monitoring managers (or large controlling shareholders). He underlines
that the dividend policy can alleviate agency problems by reducing the amount of free
157
See La Porta, R., Lopez-De-Silanes, F., Shleifer, A., and R. W. Vishny, 2000, loc. cit., p. 4-8.
158
See ibid., p. 27.
81
cash flow that might otherwise be expropriated159 and forcing insiders to raise funds in
the capital markets more frequently, consequently, subjecting themselves to outside
scrutiny160. Essentially, dividend policy can be considered as a complementary
monitoring mechanism to the existing control mechanisms. Moreover, Setia-Atmaja
(2009) found that dividends can be a more effective mechanism regarding the protection
of minority shareholders in closely-held firms in Australia, whereas the independent
directors are more effective in controlling owner-manager conflict in widely-held firms.
Higher dividends are paid when the agency conflicts are low, while low or no dividends
denote the expropriation of minority shareholders. Consequently, the payout level of
dividends may moderate both the role and the independence of the board of directors and
the auditing committee161. Alternatively, the level of the dividend payouts can be related
to the resolution of agency conflicts.
Lastly, a study also associating the corporate structure of the firm and the
dividend policy belongs to Chen et al. (2005). They document that the composition of the
board of directors has little impact on the firm performance and dividend policy.
Particularly, there is a significant negative relationship between dividend payouts and
the relationship becomes positive.
3.5 CORPORATE GOVERNANCE AND SURVIVABILITY OF IPOS.
An alternative approach indicating the necessity that IPO firms have on incorporating a
good corporate governance system, can be obtained by examining the survivability rate
of such firms. Issuing firms change their governance mechanisms, undergoing a great
pressure from the increased market monitoring and the expectations of market analysts.
159
See Jensen, M. C., 1986, Agency Costs of Free Cash Flow, Corporate Finance, and Takeover,
American Economic Review, Vol. 76, No. 2, pp. 323-324.
160
See Easterbrook, F. H., 1984, Two Agency-Cost Explanations of Dividends, American
Economic Review, Vol. 74, No. 4, p. 655.
161
See Setia-Atmaja, L., 2009, Governance Mechanisms and Firm Value: The Impact of
Ownership Concentration and Dividends, Corporate Governance: An International Review, Vol.
17, No. 6, p. 698.
82
Thus, they face challenges related to product market competition and conditions, which
-
of such firms must not come as a surprise. According to Jain and Kini (1999; 2008) a
third of IPO issuing firms in U.S. fails162 or is acquired within five years of going public.
Corporate governance characteristics can be associated with the time, which an IPO firm
remains viable, as well as with the market conditions, because firms often go public when
their cash flows are negative; consequently a slowdown in capital markets may threaten
their survival163. More specifically, the managerial ownership structure and the
governance mechanisms of the issuing firms constitute a significant reason for their
survival in the public markets.
Empirical studies164 have shown that the interrelation between the post IPO
performance of a firm and the managerial ownership structure cannot be solidly
supported, due to the contradicting evidence. Nevertheless, Hensler et al. (1997) after
investigating a large number of IPOs on NASDAQ found that the survival time for IPOs
IPO activity level in the market and the percentage of insider ownership; while the
survival time decreases upon increasing the general market level at the offering time and
the number of risk characteristics. On contrary, a similar study on the survival profile of
IPO made by Jain and Kini (2000) showed that retention of ownership by management
and offer size are not significant, whereas the involvement of venture capitalists has
positive results.
In a more recent study, Yang and Sheu (2006) tried to investigate whether the
managerial ownership structure improves the survival of IPOs by classifying the insiders
in accordance with their information access, and employing a piecewise exponential
model. Their study was based on a sample of IPOs issued in Taiwan for the period of
1992-2000. They found that IPO survival depends also on the allocation of property
162
Firms are delisted; see Ritter, J. R., and I. Welch, 2002, A Review of IPO Activity, Pricing,
and Allocations, The Journal of Finance, Vol. 57, No. 4, pp. 1795-1802.
163
See Jain, B. A., and O. Kini, 2008, The Impact of Strategic Investment Choices on Post-Issue
Operating Performance and Survival of US IPO Firms, Journal of Business Finance and
Accounting, Vol. 35, No. 3-4, p. 460.
164
See Leland and Pyle (1977); McConnell and Servaes (1990); Agrawal and Knoeber (1996)
83
IPO survival first decreases and then increases with total insider ownership at the time of
165
the offering, forming a U- . Additionally, they highlight that
survival time is positively influenced by the increase in officer-to-insider holding ratio
and not by the director-to-insider holding ratio.
It is wort
reinforces once more the assumption of agency theorists, which supports that by
to the firm166. Consequently, the agency cost of an IPO issuer is reduced and the
survivability of the firm in the aftermarket is improved.
Lowering the risk of failure of firms in the early post-issue period can be partly
rendered to the corporate governance (structure). Firms that have formulated a corporate
governance system are viable for longer period of time and have more opportunities to
adapt to the new market conditions, assuring a period in which structural changes may be
furthered.
3.6 CORPORATE GOVERNANCE CHARACTERISTICS AND EVIDENCE FROM

EMPIRICAL STUDIES.
The study of corporate governance in conjunction with corporate performance has been
the focal point of many researchers, which investigate how various corporate governance
characteristics are interrelated to the firm operation. The evidence of such studies -as
stated above- are diverging, because attributes of corporate governance are approached
by different methodologies, leading to different outcomes. It is, therefore, essential to
present few major empirical evidences stemming from well acknowledged studies that
were used for the purpose of this study. The following table 3.2 presents the relationship
165
See Yang, C. Y., and H. J. Sheu, 2006, Managerial Ownership Structure and IPO
Survivability, Journal of Management and Governance, Vol. 10, No. 1, p. 73.
166
And also align with the shareholders interests.
84
of certain corporate governance characteristics in connection with firm performance and
value. This table serves as a broad overview of this chapter theoretical framework.
Table 3.2
The relationship between corporate governance and firm performance
Positive Neutral or Negative

Board Structure
Size
Zahra and Pearce (1989): Positive Yermack (1996): Negative relationship
relationship between size and effectiveness. between board size and firm value.
Hermalin and Weisbach (2003): Larger

boards become ineffective due to less
participation in the decision making
process and more free-riding efforts of
directors
Board independency
Baysinger and Butler (1985): Positive Hermalin and Weisbach (1991); Bhagat
correlation between the proportion of and Black (2001): Higher percentage of
independent directors and the accounting independent directors on the board does not
measures of performance. have a significant impact on the accounting
Inside and outside board directors

Fama and Jensen (1983): A firm will avail Baysinger and Hoskisson (1990): Outside
from the mixed board composition in terms directors intervene on multiple boards,
of the competencies and good knowledge while they may not effectively understand
of the executive directors and the the business.
participation of non-executives in strategic
85
Rosenstein and Wyatt (1990): Positive
and board composition.

CEO duality
Rechner and Dalton (1991): Firms opting
for independent leadership have
consistently outperformed those that relied
upon duality.
Ownership
Ownership concentration
Demsetz and Lehn (1985): Ownership
concentration is not associated with the
firm performance or value.
Morck et al. (1988): At higher levels of

ownership the relationship between firm
value and ownership concentration
becomes negative, rendered to the
management entrenchment.
Beatty and Zajac (1994): A high

concentration of ownership may lead to a
lower proportion of outside directors and a
unitary leadership structure. The
relationship between board equity
ownership and the level of firm monitoring
is negative.
Setia-Atmaja (2009): Ownership
86
concentration has a negative impact on
board independence.
Management ownership
Jensen and Meckling (1976): The level of
management equity ownership increases
the value of the firm by lowering agency
costs.
Stulz (1988): A curvilinear relationship
between firm value and managerial
ownership exists. The value of a firm may
eventually decrease as managers become
more dominant in the ownership.
Blockholders
Shleifer and Vishny (1986): Blockholder
ownership increases efficiency as they have
more incentive to efficiently monitor
managers.
Mak and Kusnadi (2005): Blockholder

ownership has a positive effect on firm
value.
Family ownership
Gugler (1999): The owner-controlled firms Shleifer and Vishny (1997): A firm
outperformed significantly the manager- controlled by family may have a tendency
controlled firms. to favor family shareholders at expense of
public investors.
McConaughy et al. (2001): Founding
family managers have more incentives to
relationship between family ownership and

the performance of firms in America exists.
87
Firms controlled by founding family have
greater value and can operate more
efficiently.
Venture Capitalists
Aggarwal and Klapper (2003): Venture
capitalist ownership is positively associated
with corporate governance and
performance.
Baker and Gompers (2003): When venture

capitalists are shareholders, they provide
financial instruments, inside board
members as well as other value-added
services.
Dividend policy
Chen et al. (2005): The composition of the
board of directors has little impact on the
firm performance and dividend policy.
Source: Author
88
CHAPTER 4
Empirical Approach
4.1 TESTING HYPOTHESES.
In the light of the theoretical approach to the relationships between the corporate
governance structure, performance and value of the IPO firms that were described on the
previous chapter, this study attempts to investigate further on several hypotheses. For the
empirical portion of this study, five central hypotheses were chosen to be tested. These
hypotheses were drawn from Yermack (1996), Mak and Kusnadi (2005), Baysinger and
Bulter (1985), Bhagat and Black (2001), Agrawal and Knoeber (1996), Rechner and
, Clarkson et al. (1991),
Bruton et al. (2010), Aggarwal et al. (2002) and Su (2004), and were adjusted for the
purposes of this study. In particular, these are the following:
Central Hypothesis 1:
167
Yermack (1996) draw evidence from a sample of 452 large U.S. industrial corporations
between 1984 and 1991 showing that a convex shape association appears between board
size and firm value, which suggests an inverse relationship between board size and firm
value. Yermack (1996) stressed
ves such as
compensation and the threat of dismissal towards CEO performance are less effective in
larger boards. Additionally, Mak and Kusnadi (2005) found that an inverse relationship
between board size and firm value.
Hypothesis 1: relationship between the number of the board
Central Hypothesis 1a:

168
167
See Yermack, D., 1996, Higher Market Valuation of Companies with a Small Board of
Directors, Journal of Financial Economics, Vol. 40, No.2, p. 209.
89
Baysinger and Butler (1985) explored the relationships among performance and
composition arguing that the proportion of independent directors on the board is a
potentially important performance variable. Bhagat and Black (2001) found that board
the firm rather
is no
solid evidence that greater board independence leads to improved firm performance,
because there are hints in the other direction as well. Agrawal and Knoeber (1996) are
consistent with the last position, finding a statistically significant negative relation
between outside representation on the board of directors and firm performance.
Hypothesis 1a: percentage of independent
169
Rechner and Dalton (1991) researched on the effect that dual and independent leadership
tested null hypotheses regarding the effect of leadership structures on return on

investment, return on equity and the profit margin.
Baliga et al. (1996) found weak evidence that duality status affects the long-term
performance and suggest that determinants of firm performance, due to their high
complexity and interrelations, cannot be isolated in the context of a single variable, such
as duality.
168
See Bhagat, S., and B. S. Black, 2001, The Non-correlation between Board Independence and
Long Term Firm Performance, Journal of Corporation Law, Vol. 27, No. 2, pp. 261-263
underline that poor performance has as a consequence an increase in board independence.
Compare with Agrawal, A., and C. R. Knoeber, 1996, Firm performance and mechanisms to
control agency problems between managers and shareholders, Journal of Financial and
Quantitative Analysis, Vol. 31, No. 3, p. 394, who find a negative relationship between board
169
See Rechner, P. L. and Dalton, D. R., 1991, Research notes and communications CEO Duality
and Organizational Performance: A Longitudinal Analysis, Strategic Management Journal, Vol.
12, No. 2, p. 155.
90
Hypothesis 2:

170
underpricing level and the CEO duality in the region of Middle East and North Africa
(MENA). T
duality decreases underpricing when it is accompanied by larger strategic shareholder
Hypothesis 2a:
Central Hypothesis 3: The percentage of retained ownership affects the initial market
171
valuation
Clarkson et al. (1991) consistent with signaling theory (Leland and Pyle, 1977) found
evidence from a sample of 180 IPOs listed on Toronto Stock Exchange (TSE) between
172
1984 and 1987 that initial valuation is increasing in the ownership retention signal .
In other words, there is a positive relationship between initial market valuation and
ownership retention. More recent studies (see, e.g. Agrawal and Knoeber, 1996; Bruton
et al. 2010) focused on the effects that the concentration of retained ownership has on
firm performance of IPO firms. The ownership concentration can be particularly
important governance parameter, because it mitigates agency conflicts leading to the
enhancement of IPO firm performance and the reduction of the negative effects of the
170
CEO Duality and Ownership Structure in the Arab IPO Context, Corporate Governance: An
International Review, Vol. 17, No. 2, p. 125.
171
This central hypothesis is a paraphrase of Clarkson, P. M., Dontoh, A., Richardson, G., and S.
E. Sefcik, 1991, Retained ownership and the valuation of initial public offerings: Canadian
Evidence, Contemporary Accounting Research, Vol. 8, No. 1, p. 131.
172
See Clarkson, P. M., Dontoh, A., Richardson, G., and S. E. Sefcik, 1991, Retained ownership
and the valuation of initial public offerings: Canadian Evidence, Contemporary Accounting
Research, Vol. 8, No. 1, p. 131.
91
173
. Nevertheless, this study seeks only the relative relation between
retained ownership and IPO firm performance.
Hypothesis 3:
Central Hypothesis 4: .
Agrawal and Knoeber (1996) found a statistically significant relationship between firm
related to the performance. In addition, Balatbat et al. (2004) found a positive association
between insider ownership and firm operating performance, but not for the first three
years after the listing. Nonetheless, this s
ownership and firm value.
Hypothesis 4:
Central Hypothesis 4a: correlated with the underpricing level .
Aggarwal et al. (2002) found that managerial shareholdings are positively related with
the first- -averse managers will underprice more in
order to ensure that the IPO is succes
more at the expiration of the lockup in order to diversify their holdings. In addition, Su
(2004) found that managers and directors signal their confidence in the IPO by retaining
sizable share ownership and underpricing174.
Hypothesis 4a: positively associated
Central Hypothesis 5: Blockholder ownership is related to firm value .
173
For a more comprehensive analysis, see Bruton et al., 2010, ibid, p. 494.
174
For more information, see Su, D., 2004, Leverage, insider ownership, and the underpricing of
IPOs in China, Journal of International Financial Markets, Institutions and Money, Vol. 14, No.
1, p. 53.
92
Mak and Kusnadi (2005) found regarding the corporate governance mechanisms that
blockholder ownership is related to the firm value.
Hypothesis 5:
The following table 4.1 presents a detailed summary of the hypotheses that are
going to be tested in this study.
Table 4.1
Detailed summary of hypotheses
H0,1: board size = 0, H1, (a,b,c): board size < 0

H1a: There is a (-
H1b: There is a (-) relationship between board directors and Price-to-Book
H1c: There is a (-) relationship between board directors and Initial Returns
value and
H0,1a: independent directors = 0, H1, (a,b,c,d): independent directors > 0
H1A,a: There is a (+) relationship
H1A,b: There is a (+) relationship between independent directors and Price-to-Book
H1A,c: There is a (+) relationship between independent directors and Initial Returns
H1A,d: There is a (+) relationship between independent directors and Return on Assets
H0,2: duality = 0, H1, a : duality

H2,a: There is a (+) or (-) relationship between CEO/Chairman duality and Return on Assets
H0,2a: duality = 0, H1, a : duality

H2A,a: There is a (+) or (-) relationship between CEO/Chairman duality and Initial Returns
H0,3: retained ownership = 0, H1, a : retained ownership

H3,a: There is a (+) or (-) relationship between retained ownership and Return on Assets
H0,4: insider ownership = 0, H1, (a,b,c) : insider ownership

H4,a: There is a (+) or (-) relationship between
H4,b: There is a (+) or (-) relationship between insider ownership and Price-to-Book
93
H4,c: There is a (+) or (-) relationship between insider ownership and Return on Assets

posi
H0,4: insider ownership = 0, H1, a : insider ownership > 0
H4,a: There is a (+) relationship between insider ownership and Initial Returns
H0,5: blockholder ownership = 0, H1, (a,b,c): blockholder ownership > 0

H5,a
H5,b: There is a (+) relationship between blockholder ownership and Price-to-Book
H5,c: There is a (+) relationship between blockholder ownership and Initial Returns
94
4.2 DATA DESCRIPTION AND METHODOLOGY.
In order to examine the implications set forth in the above paragraph; this study uses a
sample of firms that went public over the 1997-2010. The sample comprises only 66
firms from the transportation sector listed on NYSE, NYSE:AMEX and NASDAQ, due
to missing and limited data. Hence, the firms studied are those for which their
prospectuses were available and the data gathered were sufficient to test the hypotheses.
The obtained data refer to both financial and corporate governance information. The
firm ere obtained from Bloomberg
database, whereas the corporate governance data were collected from disclosed
information available on S.E.C.
For the purposes of this analysis three sets of variables are used. The first set of
variables the dependent variables concerns financial information, which reflects the
value of the firms by considering both sides of the market, institutions (i.e. investment
banks) and investors, and the operating performance. Variables representing firm value
-to-Book (P/B) ratio, Initial Returns Rates (or Underpricing).
Firm performance is examined by employing the Return on Assets at the end of the IPO
year175 as variable. This study grasps the importance of each ratio and employs them in
atio and Price-to-Book ratio176 were
prospectuses filed in S.E.C. respectively, while the underpricing level of the studied
(the first-day closing price offer price) / offer price.
175
Consistent with Bruton et al. (2010) the Return on Assets variable was chosen as performance
Bruton, G. D., Filatotchev,

I., Chahine, S., and M. Wright, 2010, Governance, Ownership Structure, and Performance of IPO
Firms: The Impact of Different Types of Private Equity Investors and Institutional Environments,
Strategic Management Journal, Vol. 31, No. 5, p. 500.
176
true value of firms in transportation industry
Gounopoulos, D., and C. Nounis, 2009, Global shipping IPOs performance, Maritime Policy &
Management, Vol. 36, No. 6, p. 485. Price-to-book ratio was calculated as Offer Price divided by
the pro forma net (tangible) book value per share after giving effect to the offering.
95
The second set of variables the independent variables concerns governance
information and refers to specific board characteristics such as Size, number of
Independent Directors and Chairman and CEO duality. Further, variables showing the
ownership structure were included, because they help testing the stated hypotheses. The
level of insider (or management) and blockholder ownership are the two additional
percentage of the board size, that the CEO/Chairman variable i
amount of shares outstanding after the IPO. The corporate governance data were
collected from final prospectuses (424B4 form) and the, F-1/S-1, 20 F and DEF 14 A
forms.
Lastly, a third set of variables was used in order to ensure that the relations found
were not affected by the absence of other variables and to validate as well those
relations177. The control variables used for this purpose are the natural logarithm of total
178
, the natural
-reputable
Citigroup, Goldman Sachs, JPMorgan, Merrill),
and the standard deviation of the daily aftermarket return calculated over a 60 days period
following the first day closing price (Volatility).
The studied sample is comprised from firms operating in the transportation

industry. Specifically, it consists of the IPOs of 47 shipping companies, 7 airlines, 3
logistic services companies, 1 freight railroad firm, 2 truckload carriers and 6 companies
providing other transportation and freight forwarding services.
Table 4.2 provides few summary statistics for the IPO sample. The distribution of
IPOs of the sample is presented in the first panel. Panel B shows the means and medians
of few characteristics of the sample. The level of underpricing (first-day initial return) of
177
178
See Nelson, T., 2003, The persistence of founder influence: Management, Ownership, and
Performance Effects at Initial Public Offering, Strategic Management Journal, Vol. 24, No. 8, p.
717. Firm Size was not selected as control variable, because Chahine (2004) found a positive and
significant association with the offer Price-to-Book ratio.
96
this sample has a mean value of 9.88% and a median of 0.96%, while the market adjusted
initial returns have an average of 8.91% underpricing with a median of 2.09%. The mean
value of offer price is $16.35 and the average size of the issues is $258.33 million.
Table 4.2
Sample summary statistics
Panel A: Number of Issues Per Year

Year Number of Issues
1997 3
1998 1
1999 1
2000 2
2001 1
2002 5
2003 3
2004 5
2005 18
2006 7
2007 10
2008 4
2009 2
2010 4
Total 66
Panel B: Characteristics of IPO Sample
Descriptive Measure Mean Median
Initial Return (%) 9.884 0.96
Adjusted Initial Returns (%) 8.912 2.09
Offer price ($) 16.351 16
Size of the issue (in $ million) 258.336 159,25
97
4.2.1 THE MODEL.
Following the methodology of previous IPO literature (Chahine, 2004), this study is also
proposing cubic models of corporate ownership in order to control for non-linear
relationships between the dependent variables and the corporate governance variables 179,
wherein high levels of significance appear, because they offer a greater explanatory
power180. Therefore, the testable equation that this study uses is equal to:
DV = 0 + 1 Board Size
+ 2 Board Independent Directors
+ 3 Board Independent Directors2
+ 4 CEO and Chairman Duality
+ 5 Retained Ownership
+ 6 Retained Ownership2
+ 7 Insider Ownership
+ 8 Insider Ownership2
+ 9 Insider Ownership3
+ 10 Blockholder Ownership
+ 11 Blockholder Ownership2
+ DV
(1)
Where, DV, the dependent variable, represents the -to-Book

ratio, the Return on Assets or the first-day initial returns (underpricing). This equation
investigates the potential effect of the selected governance metrics on the firm value and
tio, Price-to-Book ratio, Return on Assets ratio
and underpricing level).
179
180
J. M., 1999, CEO Ownership and Firm Value, Managerial and Decision Economics, Vol. 20, No.
1, p. 4.
98
4.3 EMPIRICAL RESULTS.
4.3.1 DESCRIPTIVE STATISTICS AND CORRELATION AMONG VARIABLES.
Table 4.3 presents a summary of means, medians and standard deviation of the variables
used to attest the hypotheses under consideration. The variables presented by the table are
organized and depicted in three groups (corporate governance characteristics, dependent
variables and control variables, accordingly). Regarding the corporate governance
variables, it can be noticed that board size has a mean of round 7 directors, changing
estimation of seven (or eight) directors as the optimal board size. The proportion of
directors deemed as independent on board has a mean of 57.37%, which is consistent
with the listing requirements, stipulating a majority of independent directors on the board.
Table 4.3 indicates that dual leadership of CEO and Chairman for this sample has an
average value of 34.8%. The level of the retained ownership after the IPO of the studied
32.5%, and the percentage ownership belonging to blockholders has a mean value of
49.9%.
The second group of variables on table 4.3, presenting the dependent variables,
-to-Book ratio has a mean of
2.6%. The Initial Returns (underpricing) level is relatively low with a mean value of
9.8% and the adjusted Return on Assets, has an average of 6.4%.
Lastly, the third group presented provides us with the values of the natural
logarithms of total assets and age, the percentage of firms with reputable underwriters
and the stock standard deviation for sixty days. Although not shown by this table, the
average total assets of the studied sample are $1,069.2 million while the average age of
the firms until their IPO is 17.7 years. Moreover, a 65% of the issuing firms had a
reputable underwriter.
99
Table 4.3
Descriptive statistics (Mean, Median and Standard Deviation)
Number Mean Median Std. Dev.

Variables
Board Size 66 6.712 7 1.919
% Independent directors 66 0.5737 0.188 0.188
Duality CEO/chair 66 0.348 0 0.480
% Retained ownership 66 0.581 0.613 0.228
% Insider ownership 66 0.325 0.199 0.500
% Block ownership 66 0.499 0.528 0.263
Value and performance metrics
66 1.619 1.445 0.816
P/B 66 2.603 1.938 6.443
Initial Returns 66 9.884 0.964 40.847
Adj. Return on Assets 66 6.431 4.83 8.685
Control variables
LN Total Assets 66 6.021 6.005 1.167
66 1.934 1.945 1.447
Underwriter Reputation 66 0.651 1 0.480
Stock Return Volatility 66 1.310 1.045 0.983
Table 4.4 presents the Pearson correlation matrix of the sample variables
employed for controlling the hypotheses. This correlation reveals dependencies that
provide us with more explanatory power over the variables behavior in the model. Table
percentage of retained ownership, the natural logarithm of total assets and the stock
return volatility. It is important to note that board size appears to be positively related
relationship between those two variables exists. Further, board size appears also positive
related with the Price-to-Book ratio and the Initial Returns though these relationships are
not significant. Statistically significant, as expected, are the relationships between the
percentage of retained ownership and the percentage of insider and blockholder
ownership, the natural logarithm of total assets and the stock return volatility.
100
Table 4.4
Pearson correlation matrix
P/B Initial Adj. ROA Board Size % Independent Duality CEO/chair

Returns directors
1.000
P/B ratio -0.015 1.000
Initial Returns 0.083 -0.015 1.000
Adj. ROA 0.321*** -0.051 -0.118 1.000
Board Size 0.357*** 0.132 0.164 0.007 1.000
% Independent directors -0.156 -0.166 -0.107 0.014 -0.007 1.000
Duality CEO/chair -0.060 -0.155 -0.117 0.003 0.010 0.129 1.000
% Retained ownership 0.148 0.058 0.153 0.064 0.295** 0.016 0.038
% Insider ownership 0.004 -0.0283 0.086 -0.035 -0.141 0.036 0.230*
% Block ownership -0.098 0.036 0.117 0.136 -0.092 0.062 -0.040
LN Total Assets 0.053 -0.011 -0.162 0.052 0.442*** 0.039 0.018
0.162 0.174 0.015 -0.111 0.338*** -0.106 -0.113
Underwriter Reputation 0.143 -0.199 -0.227* 0.178 0.089 -0.057 -0.065
Stock Return Volatility 0.113 -0.066 0.172 -0.103 0.298** 0.018 0.131
% Retained % Insider % Block LN Total Underwriter Stock Return

ownership ownership ownership Assets Reputation Volatility
% Retained ownership 1.000
% Insider ownership -0.003 1.000
% Block ownership 0.466*** 0.120 1.000
LN Total Assets 0.298** -0.169 0.024 1.000
0.286** -0.064 -0.144 0.174 1.000
Underwriter Reputation 0.061 -0.047 0.050 0.393*** -0.131 1.000
Stock Return Volatility 0.260** -0.097 -0.170 0.265** 0.216* 0.001 1.000
*, **, ***: Denote significance at the 0.10, 0.05 and 0.01 levels, respectively.
101
Worthy of remark is the relationship between the Initial Returns and the underwriter
reputation, which is in line with Beatty and Ritter (1986), who argue that investment
banks have an incentive to ensure that new issues are underpriced by enough; otherwise,
they can jeopardize their reputation. Consistent with this position are Kenourgios,
associated with underpricing. Moreover, a significant association is revealed between the
be rendered to role and the incentives of management (insiders) in the firm.
At this juncture must be stressed that the Pearson correlation matrix did not show
any significance between the percentage of independent directors on the board and the
adjusted Return on Assets nor between the duality structure of the firm and the adjusted
Return on Assets, as would have been expected. Nevertheless, the nature of their
association supports previous literature showing in both cases a positive relationship
(Bhagat and Black, 2001; Rechner and Dalton, 1991).
4.3.2 REGRESSION RESULTS.
In an effort to provide evidence of the effects of corporate governance characteristics on
regressions181 -to-Book ratio, Initial Returns and adjusted

Return on Assets as dependent variables. However, from the total number of models only
seven were statistically significant to confirm or reject the hypotheses formed for this
The regressions in table 4.5 investigate the hypotheses concerning the value of the
firm, whereas in table 4.6 the firm value and performance. Model 1 runs a regression
percentage of independent directors on the board and the percentage of retained

ownership.
181
The results of the total number of models (significant and not) are presented in the appendix.
102
Table 4.5
Most significant regression models (1-4)
OLS OLS OLS OLS

Model 1 Model 2 Model 3 Model 4
Constant 2.178* 0.924 1.579* 2.342*
p-value (0.093) (0.332) (0.066) (0.083)
Board Size 0.195*** 0.173*** 0.191***
p-value (0.002) (0.004) (0.003)
% Independent
-4.013 -4.447
directors
(0.170) (0.132)
p-value
% Independent
3.190 3.666
directors2
(0.157) (0.104)
p-value
Duality CEO/chair -0.072 -0.098
p-value (0.701) (0.575)
% Retained ownership 0.077 0.651 2.891
p-value (0.973) (0.764) (0.272)
% Retained ownership2 0.141 -0.396 -2.104
p-value (0.949) (0.846) (0.375)
% Insider ownership -0.974 -1.439
p-value (0.514) (0.294)
% Insider ownership2 1.536 2.522
p-value (0.499) (0.213)
% Insider ownership3 -0.337 -0.559
p-value (0.505) (0.215)
% Block ownership -2.176
p-value (0.227)
% Block ownership2 1.535
p-value (0.309)
LN Total Assets -0.175* -0.160 -0.049 -0.184*
p-value (0.089) (0.110) (0.729) (0.093)
0.015 0.038 0.114 -0.018
p-value (0.851) (0.608) (0.121) (0.814)
Underwriter Reputation 0.305 0.348* 0.294 0.309
p-value (0.115) (0.056) (0.104) (0.126)
Volatility
p-value
R2 0.234 0.184 0.063 0.282
F 2.735 2.734 4.258 5.181
P-value 0.012 0.016 0.001 0.000
*, **, ***, ****: denote p<0.10, p<0.05, p<0.01 and p<0.001, respectively
103
variables. The models with adjusted Return on Assets as dependent variable include as
Model 1 shows that board size is significantly related to firm value (p<0.01),
hypothesis 1 is partly confirmed. Interestingly, models 2, 4 and 5 indicate also a strong

Contrariwise, none
of the regressions using Price-to-Book ratio as dependent variable showed any significant
relation with board size.
Further, Hypothesis 1a cannot be confirmed by models 1, 4 and 5, because the

coefficient of the percentage of independent directors on board lacks significance.
Therefore, the null hypothesis (H0,1A : independent directors = 0) cannot be rejected. The
results from the regressions on Models 4 and 5 do not show any relationship between the
duality structure of the firm and the value of the firm. In addition, the regression model in
which adjusted Return on Assets was used as dependent variable also did not show any
relation with the duality variable182. Hypothesis 2 cannot be confirmed by the regression
run on this sample. Moreover, model 5 indicates a negative relationship between Initial
Returns and the duality variable, though the p-value is marginally significant (at 0.10) to
reject the null hypothesis 2a.
The regression on model 6 (table 4.6) in which the adjusted Return on Assets ratio
is the dependent variable, indicates that there is no significant effect of the percentage of
ship after the IPO is
regression models reject the fourth hypothesis.
182
This regression model is presented in the appendix.
104
Table 4.6
Most significant regression models (5-7)
Initial Returns ROA ROA

OLS OLS OLS
Model 5 Model 6 Model 7
Constant 89.27 3.796 6.115*
p-value (0.174) (0.531) (0.087)
Board Size 6.155**
p-value (0.034)
% Independent directors -164.9
p-value (0.145)
% Independent directors2 127.3
p-value (0.135)
Duality CEO/chair -15.91
p-value (0.136)
% Retained ownership -63.14 7.497
p-value (0.711) (0.764)
% Retained ownership2 89.38 -3.116
p-value (0.548) (0.889)
% Insider ownership 36.29 -13.11
p-value (0.665) (0.473)
% Insider ownership2 -6.141 31.19
p-value (0.968) (0.292)
% Insider ownership3 -0.355 -7.545
p-value (0.992) (0.258)
% Block ownership -45.08
p-value (0.718)
% Block ownership2 46.04
p-value (0.682)
LN Total Assets -7.568
p-value (0.355)
-4.953 -0.582 -0.557
p-value (0.279) (0.511) (0.491)
Underwriter Reputation -17.39 2.946 3.303
p-value (0.343) (0.215) (0.207)
Volatility -0.992 -0.637
p-value (0.264) (0.439)
R2 0.251 0.058 0.095
F 1.903 0.765 7.587
P-value 0.048 0.057 0.000
105
Hypothesis 4a is controlled by model 5, a cubic model, in which the Initial Returns
(dependent variable) are regressed with all the corporate governance variables. This
Returns.
The last hypothesis this study tests is regarding the
for this variable is obvious in this model as well, leading to the acceptance of the null
hypothesis (H0,5: blockholder ownership = 0).
106
CONCLUSION
Eventually, many firms that reach a certain stage of growth tend to resort to equity
financing in order to foster and secure their opportunities for a sustainable development.
The prevalent way of achieving such type of financing is through an IPO. The conversion
of equity into shares and consequently its issuance to the public provides companies
efficiently with money to carry out their investment plans. Nevertheless, raising capital
for the future operation of the firm. The IPO is a standardized and complex process,
which requires careful planning and preparation. Further, changes that take place during
preparation on managerial level and corporate governance practices in order for
by
many studies. The explanation of the IPO underpricing and IPO underperformance in
conjunction with the company attributes has been a dominant subject to research. The
IPO underpricing refers to the difference between the offer price and the closing price on
the first day of the IPO trade, while IPO underperformance refers to the fact that IPO
-run stock returns are significantly less than those of non-IPO firms. Theories
such as asymmetric information and behavioral approaches have been employed to
explain (partially) why IPOs are underpriced. Underperformance, on the other hand, has
internal corporate mechanisms or not, agency theorists searched for interrelations

between corporate governance characteristics and corporate value metrics (level of
underpricing, firm value, stock performance). Interestingly, the results arising from the
hypotheses formed to reveal the causal nexus between corporate governance and firm
value and performance were rather diverging.
This study draws from existing literature five central hypotheses, which attempts
to verify in a sample of 66 firms from the transportation industry listed on American
107
stock exchanges. To that end, it follows a cubic model equation employed by Griffith
(1999) and Chahine (2004), from which it is possible to control for non linear
relationships. The model equation uses as dependent variables either To
Price-to-Book ratio, Initial Returns or Return on Assets. As for independent variables are
the board size, the percentage of independent directors on the board, the existence of
duality structure, the percentage of retained ownership, the percentage of ownership that
belongs to insiders and the percentage of ownership of blockholders. Each dependent
variable was tested in different OLS regression models, the total number of which was
nineteen.
Despite the fact that nineteen regression models were ran, only seven of them
were found to be statistically significant in order to draw evidence that will confirm or
sis
1, regarding the relationship between the number of the directors on the board and the
value of the IPO firm, was confirmed. Strong significant relationship was found between
ip was
described as negative according to Yermark (1996) and Mak and Kusnadi (2005), the
regression results in models 1, 2, 4 and 5 showed a positive correlation at significant
levels of 1% for the first three models and 5% for the last. The explanation for this
relation can be sought in signaling theory. Even though, the listing authorities and the
stock exchanges impose as listing requirement a majority of independent directors on
directors boards, resulting often to larger boards, firms use the employment of new
directors as medium to signal their firm value to the potential investors.
However, the Hypothesis 1a concerning the relationship between the percentage

of independent directors on the board and the firm value and performance of the IPO
firm, was rejected due to lack of significant models and coefficients. Regression models
1, 4 and 5 did not show any considerable significance level. Notwithstanding, the
presented relation by these models was consistent with Agrawal and Knoeber (1996),
who describe this relation as negative.
Further, Hypothesis 2 that refers to the connection between the duality structure
and the performance of the IPO firm was rejected because none of the regression models
108
had considerable significance. Model 17 on (appendix) table A.4 shows a positive
association between duality structure variable and Return on Assets variable, which is in
contrast with Rechner and Dalton (1991).
Furthermore, Hypothesis 2a was rejected as well, even though the regression

model 5 showed a weak significance (slightly over 10%). Regression results from this
between Initial Returns and the duality structure variable.
From Hypothesis 3 this study attempts to find a relation between retained

ownership and the firm performance, based on the relative assumption that retained
ownership signals the firm value on the market. Regression model 6 indicated that there
is no significant effect of the percentage of retained owner
though it important to note retained ownership seems to be positively associated with
Return on Assets.
percentage, firm value and firm performance. Agrawal and Knoeber (1996) and Balatbat
el al. (2004) found a positive and significant association between those variables, but this
rcentage.
Moreover, model 5, which tested Hypothesis 4a, indicated a positive association
(2002). In this model as well there was no significant coefficient that would reject the
null hypothesis.
The last Hypothesis this study proposed was regarding the relationship between
the percentage of blockholder ownership and the value of the IPO firm. Hypothesis 5 was
tested with regression model 4, which showed a negative relat
who found a positive association. Nevertheless, the significance level of the blockholder
variable was not enough to confirm this hypothesis.
109
Overall, the results from this research showed that there is little dependence
between the corporate governance variables and the IPO firm value and performance
variables. Even so, it is important to note that this study does not anticipate that future
research will lead to the same outcome. Therefore, it hopes and urges for further
investigation on this matter. Studying the role and the effects of corporate governance on
the value and performance of IPO firms still remains an intriguing and evolving research
subject.
110
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http://sec.gov/about/whatwedo.shtml
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http://www.heinonline.org/HOL/Page?handle=hein.journals/vllalr27&div=9&g_sent=1#6
7
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http://www.nyse.com/regulation/nyse/1147474807344.html
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http://www.sec.gov/about/whatwedo.shtml
http://www.soxlaw.com/
http://www.soxtoolkit.com/
128
APPENDIX
Table A.1
Q
OLS OLS OLS OLS OLS
(1) (2) (3) (4) (5)
Constant 2.178* 0.924 1.579* 1.847*** 2.342*
p-value (0.093) (0.332) (0.066) (0.008) (0.083)
Board Size 0.195*** 0.173*** 0.191***
p-value (0.002) (0.004) (0.003)
% Independent
-4.013 -4.447
directors
(0.170) (0.132)
p-value
% Independent
3.190 3.666
directors2
(0.157) (0.104)
p-value
p-value (0.701) (0.575)
% Retained
0.077 0.651 2.891
ownership
(0.973) (0.764) (0.272)
p-value
% Retained
0.141 -0.396 -2.104
ownership2
(0.949) (0.846) (0.375)
p-value
% Insider
-0.974 -1.439
ownership
(0.514) (0.294)
p-value
% Insider
1.536 2.522
ownership2
(0.499) (0.213)
p-value
% Insider
-0.337 -0.559
ownership3
(0.505) (0.215)
p-value
% Block ownership -1.531 -2.176
p-value (0.344) (0.227)
% Block
1.337 1.535
ownership2
(0.365) (0.309)
p-value
LN Total Assets -0.175* -0.160 -0.049 -0.054 -0.184*
p-value (0.089) (0.110) (0.729) (0.654) (0.093)
0.015 0.038 0.114 0.107* -0.018
p-value (0.851) (0.608) (0.121) (0.092) (0.814)
Underwriter
0.305 0.348* 0.294 0.357* 0.309
Reputation
(0.115) (0.056) (0.104) (0.065) (0.126)
p-value
129
Volatility
p-value
R2 0.234 0.184 0.063 0.075 0.282
F 2.735 2.734 4.258 1.226 5.181
P-value 0.012 0.016 0.001 0.308 0.000
Table A.2
Regression results with Price-to-Book ratio as dependent variable
P/B P/B P/B P/B P/B

OLS OLS OLS OLS OLS
(6) (7) (8) (9) (10)
Constant 3.428 -1.280 3.067 1.434 3.507
p-value (0.505) (0.812) (0.516) (0.662) (0.527)
Board Size 0.450 0.458 0.516
p-value (0.259) (0.256) (0.355)
% Independent
-10.48 -9.243
directors
(0.331) (0.420)
p-value
% Independent
4.458 3.762
directors2
(0.656) (0.736)
p-value
p-value (0.152) (0.268)
% Retained
5.408 9.325 7.427
ownership
(0.733) (0.576) (0.640)
p-value
% Retained
-5.040 -8.726 -7.426
ownership2
(0.747) (0.602) (0. 647)
p-value
% Insider
-5.318 -4.221
ownership
(0.687) (0.821)
p-value
% Insider
6.699 3.928
ownership2
(0.689) (0.862)
p-value
% Insider
-1.413 -0.706
ownership3
(0.692) (0.883)
p-value
% Block ownership -0.578 0.063
p-value (0.957) (0.997)
% Block
2.313 2.356
ownership2
(0.806) (0.878)
p-value
130
LN Total Assets 0.089 0.112 0.124 0.184 -0.008
p-value (0.854) (0.813) (0.781) (0.669) (0.990)
0.348 0.352 0.653 0.680 0.382
p-value (0.439) (0.385) (0.222) (0.198) (0.537)
Underwriter
-2.835 -2.765 -2.847 -2.613 -3.212
Reputation
(0.199) (0.200) (0.264) (0.256) (0.298)
p-value
Volatility
p-value
R2 0.104 0.103 0.068 0.069 0.136
F 0.733 0.540 1.998 0.769 1.692
P-value 0.661 0.800 0.080 0.575 0.086
Table A.3
Regression results with Initial Returns as dependent variable
Initial Returns Initial Returns Initial Returns Initial Returns Initial Returns
OLS OLS OLS OLS OLS
(11) (12) (13) (14) (15)
Constant 92.58 41.45 25.52 42.75 89.27
p-value (0.181) (0.477) (0.604) (0.350) (0.174)
Board Size 6.185** 5.491** 6.155**
p-value (0.018) (0.027) (0.034)
% Independent
-159.4 -164.9
directors
(0.128) (0.145)
p-value
% Independent
120.1 127.3
directors2
(0.120) (0.135)
p-value
p-value (0.196) (0.136)
% Retained
-53.43 -24.08 -63.14
ownership
(0.618) (0.811) (0.711)
p-value
% Retained
85.94 59.22 89.38
ownership2
(0.482) (0.615) (0.548)
p-value
% Insider
-11. 65 36.29
ownership
(0.927) (0.665)
p-value
% Insider
71.95 -6.141
ownership2
(0.802) (0.968)
p-value
131
% Insider
-18.42 -0.355
ownership3
(0.907) (0.992)
p-value
% Block ownership -40.15 -45.08
p-value (0.637) (0.718)
% Block
63.48 46.04
ownership2
(0.534) (0.682)
p-value
LN Total Assets -9.760 -9.030 -1.758 -4.125 -7.568
p-value (0.243) (0.269) (0.798) (0.556) (0.355)
-4.224 -3.767 -0.327 0.862 -4.953
p-value (0.364) (0.382) (0.932) (0.810) (0.279)
Underwriter
-18.30 -17.44 -14.98 -15.07 -17.39
Reputation
(0.241) (0.245) (0.307) (0.320) (0.343)
p-value
Volatility
p-value
R2 0.196 0.181 0.092 0.086 0.251
F 1.453 1.467 1.520 1.358 1.903
P-value 0.195 0.197 0.185 0.253 0.048
Table A.4
Regression results with Return on Assets ratio as dependent variable
ROA ROA ROA ROA

OLS OLS OLS OLS
(16) (17) (18) (19)
Constant 7.842 6.137** 3.796 6.115*
p-value (0.122) (0.011) (0.531) (0.087)
Board Size 0.322
p-value (0.485)
% Independent
-14.38
directors
(0.458)
p-value
% Independent
13.99
directors2
(0.446)
p-value
Duality CEO/chair 0.341
p-value (0.891)
% Retained ownership 7.497
p-value (0.764)
% Retained ownership2 -3.116
p-value (0.889)
132
% Insider ownership -13.11
p-value (0.473)
% Insider ownership2 31.19
p-value (0.292)
% Insider ownership3 -7.545

p-value (0.258)
% Block ownership
p-value
% Block ownership2
p-value
LN Total Assets
p-value
-0.594 -0.401 -0.582 -0.557
p-value (0.504) (0.351) (0.511) (0.491)
Underwriter Reputation 2.810 3.093 2.946 3.303
p-value (0.259) (0.192) (0.215) (0.207)
Volatility -0.835 -0.812 -0.992 -0.637
p-value (0.335) (0.351) (0.264) (0.439)
R2 0.056 0.048 0.058 0.095
F 0.887 0.808 0.765 7.587
P-value 0.510 0.524 0.057 0.000
133

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“Organizational models, corporate governance structure and Initial Public

List of Figures ......................................................................................................................5

List of Tables .......................................................................................................................5

Part One Theoretical Approach

1.1 Financial instruments ......................................................................................... 12

1.2 Initial Public Offering definition ........................................................................ 15

1.4 IPOs in concept of advantages and disadvantages ............................................. 20

1.5 The steps to an IPO............................................................................................. 24

1.6 New York Stock Exchange (NYSE) listing requirements ................................. 33

1.7 Underpricing ....................................................................................................... 35

1.8 Brief view on U.S. IPO market activity ............................................................. 46

2.1 Corporate planning and the IPO process ............................................................ 50

2.1.1 Planning guidance for an IPO ..................................................................... 60

2.2 Management quality and IPO performance ........................................................ 62

2.3 Management and hostile takeover defenses of IPO firms ..................................64

3.1 Corporate governance and issuing companies ...................................................68

3.3 IPO Underpricing and corporate governance structure ...................................... 77

3.4 Corporate governance, firm performance and dividend policy .......................... 81

3.5 Corporate governance and survivability of IPOs ............................................... 82

Part Two Empirical Approach

4.1 Testing hypotheses ............................................................................................. 89

4.2 Data description and methodology ..................................................................... 95

4.2.1 The Model ................................................................................................... 98

4.3 Empirical Results................................................................................................ 99

4.3.1 Descriptive statistics and correlation among variables ............................... 99

4.3.2 Regression results ..................................................................................... 102

Conclusion ....................................................................................................................... 107

References ........................................................................................................................ 111

Appendix .......................................................................................................................... 129

1.1 Claims and financial markets ....................................................................................... 14

1.3 Underpricing over the years in U.S.............................................................................. 45

1.4 IPOs performance since 1990 ...................................................................................... 47

1.5 IPOs volume and value since 2005 (quarterly) ............................................................ 48

2.1 Elements of the strategic management process ........................................................... 52

2.2 The strategic planning process ..................................................................................... 54

2.3 The functional structure ............................................................................................... 56

2.4 Divisional structure ...................................................................................................... 57

2.5 Matrix structure............................................................................................................ 58

2.6 SWOT analysis ............................................................................................................ 60

1.1 Alternatives to IPOs ..................................................................................................... 16

1.2 IPO Expenses ............................................................................................................... 23

1.3 Biggest Underwriters based on proceeds ..................................................................... 25

1.4 The IPO steps ............................................................................................................... 31

1.5 NYSE listing requirements .......................................................................................... 35

4.1 Detailed summary of hypotheses ................................................................................. 93

4.2 Sample summary statistics ........................................................................................... 97

4.3 Descriptive statistics (Mean, Median and Standard Deviation)................................. 100

4.4 Pearson correlation matrix ......................................................................................... 101

4.5 Most significant regression models (1-4) .................................................................. 103

4.6 Most significant regression models (5-7) .................................................................. 105

A.2 Regression results with Price-to-Book ratio as dependent variable.......................... 130

Keywords: management; corporate governance; IPO

By employing a comprehensive approach, both theoretical and empirical, this

management posture regarding the development of antitakeover defenses shortly after

Theoretical Approach of Initial Public Offerings

1.1 FINANCIAL INSTRUMENTS.

In the developed economies, worldwide, business firms, individual investors and

A financial instrument often called financial asset or financial security1 is a

Claims and financial markets