UNDERPRICING, OWNERSHIP AND CONTROL IN INITIAL PUBLIC OFFERINGS OF EQUITY SECURITIES IN THE UK

In this paper we examine how separation of ownership and control evolv es as a result of an Initial Public Offering (IPO) and how the underpr icing of the issue can be used by insiders to retain control. Using da ta from a sample of 69 IPOs in the UK, we show that underpricing is us ed to ensure oversubscription and rationing in the share allocation pr ocess so as to allow owners to discriminate between applicants for sha res and to reduce the block size of new shareholdings. We find that of the pre-IPO shareholders in a firm, directors sell only a modest frac tion of their shares at the time of the offering and in the seven subs equent years. In contrast, holdings of non-directors are virtually eli minated during the same period. As a result, in less than seven years, almost two-thirds of the offering company's shares have been sold to outside shareholders, thereby substantially advancing the process of s eparation of ownership and control. Additional evidence in the paper s uggests that rationing in the IPO discriminates against applicants who apply for large blocks, and that larger underpricing is associated wi th smaller blocks being held by new investors some seven years after t he IPO. Also, there is a low level of hostile takeovers in the period of up to ten years after the IPO. which is consistent with effective p rotection by insiders against hostile changes of control.