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Monitoring as a Motivation for IPO Underpricing

Authors

  • ONUR ARUǦASLAN,

  • DOUGLAS O. COOK,

  • ROBERT KIESCHNICK

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    • Onur Aruǧaslan is from Western Michigan University, Douglas O. Cook is from the University of Alabama and Robert Kieschnick is from the University of Texas at Dallas. The authors wish to thank an anonymous referee, Rick Green (the editor), Ted Day, Larry Merville, Suresh Radhakrishnan, Scott Smart, Harry Turtle (FMA discussant), and Yexiao Xu for their suggestions for improving this paper. Cook acknowledges the partial support of a summer grant from the Robert M. Hearin Support Foundation.


ABSTRACT

Brennan and Franks (1997) and Stoughton and Zechner (1998) provide contrasting arguments for why monitoring considerations create incentives for managers to underprice their firms' IPOs (initial public offerings). Like Smart and Zutter (2003), we examine these arguments using a sample of U.S. IPOs. However, we find evidence that the determinants of initial returns, institutional shareholdings, and post-IPO likelihood of acquisition are not consistent with these arguments. Thus, we conclude that monitoring considerations are not important determinants of IPO underpricing.

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