1. Ownership Structure and IPO Valuation Yeh Yin-Hua and Pei-Gi Shu Fu-Jen Catholic University

2. 2 Introduction How does the ownership structure of an IPO firm affect the price settings and the initial returns? Managerial monitoring consideration Brennan and Franks (1997) :the reduced monitoring hypothesis  excess demand for issued shares through underpricing to reduce the likelihood of being monitored by institutional shareholders Smart and Zutter (2003) find that with voting control secured in the first place, dual-class IPOs experienced less underpricing than single-class IPOs.

3. 3 Introduction Other than monitoring considerations, the controlling shareholder’s wealth effect is implied in the ownership structure, which in turns affects the IPO price setting. IPO price setting monitoring consideration  diverse-ownership economies In ownership-concentrated economies, the controlling shareholders’ voting rights are well-entrenched before IPOs. The wealth effect  ownership-concentrated economies

4. 4 Introduction The ownership structure manifests the controlling shareholders’ motives and stakes in the negotiations and provides convincing signals to the underwriter and outside investors. Firm’s IPO is a continuously negotiating process: controlling shareholders of issuing firms, associated underwriters, and outside investors  the IPO price multiples and initial returns.

5. 5 Investors IPOs Controlling Shareholder Underwriter s Price Multiple Initial Return

6. 6 Introduction The interest-alignment hypothesis (La Porta et al., 2002; Claessens et al., 2002) Controlling shareholder: High cash flow rights  high offering price Underwriters: accept high offering price In addition, the C.S. with high cash flow rights does not need to have a low offering price to reduce outside monitoring. Hypothesis 1: The comparable price multiples of IPO firms are positively correlated with the C. S. cash flow rights.

7. 7 The Negative expropriation hypothesis The C. S. having voting rights far exceeding their cash- flow rights, the underwriters on behalf of outside investors worry about the possibility of wealth exploitation by the C.S. and are reluctant to spare a higher offer price. Since these C.S. only have to bear a small portion of underpricing costs, they would not be as insistent as when they have high cash-flow rights. Hypothesis3: The comparable price multiples of IPO firms are negatively correlated with the divergence between the C.S. degree of cash flow rights and voting rights.

8. 8 Introduction The initial return The initial returns are further intervened by outside investors. A positive relation between cash-flow rights and initial returns and a negative relation between a deviating voting-cash structure and initial returns Outside investors are inaccessible to the information which might blur the predicted relations

9. 9 Data and Methodology Our sample consists of 218 Taiwanese IPO firms in 1992-2001 sampling period. Corporate governance Ownership: voting rights, cash flow rights, deviation Second largest shareholder Board composition: the proportion the directors and supervisors represented by the controlling shareholder

10. 10 Variables IPO price multiple We value IPOs using price multiples, such as offering price-to-book, price-to-sales, and price-to- EBITDA 3 yeas average prior to IPO. These price multiples deflated by the multiples of matching firm. Initial return the initial return of an IPO as the difference between the price on the first day that is not closed at the limit and the offer price divided by the offer price.

11. 11 Year Cash flow rights P/B IPO P/B matching P/B DM P/S DM P/EBITDA DM TSMC UMC 199454.526.3383.2711.9371.7301.355

12. 12 Basic Statistics VariableMeanS. D.Q1 Media n Q3 Panel A: Ownership Structure Voting Rights (%)38.48121.83122.17936.07054.001 Cash Flow Rights (%)31.39520.47515.93527.91043.338 Voting Rights – Cash Flow Rights (%)7.08510.3540.0002.32011.030 Cash Flow Rights/Voting Rights (%)81.39023.15364.80393.374100.00 Dummy (Second Largest Shareholder)0.4680.5000.000 1.000 Dummy (Pyramidal)0.3120.4640.000 1.000 Dummy (Cross Shareholding)0.1330.3400.000 Proportion of Directorates and Supervisors (%)39.44520.25325.00037.50050.000 Panel B: Price Multiples of IPOs (deflated by the Multiples of Matching Sample) 3-year averaged (Price/Book Value per share) Prior to IPO1.1660.8160.6780.9841.394 3-year averaged (Price/Sales per share) Prior to IPO1.2042.9410.3380.5891.133 3-year averaged (Price/EBITDA per share) Prior to IPO1.0061.8940.4160.6480.957 Panel C: Initial Returns Initial Returns (%)29.02433.7534.05118.53348.669 Adjusted Initial Returns (%)28.96733.6125.07218.99646.729

13. 13 Regression of Price-to-Book Multiple on Corporate Governance Independent Variable Dependent Variable: IPO Price-to-Book Multiple deflated by Matching Sample Intercept -0.440 (-0.583) -0.265 (-0.353) -1.120 (-1.336) -0.244 (-0.322) -0.307 (-0.410) -0.298 (-0.399) Cash flow Rights 0.009 (1.985)** Voting Rights – Cash Flow Rights -0.012 (-1.372) -0.023 (-2.024)** Cash Flow Rights / Voting Rights 0.009 (2.324)** Proportion of Directorates and Supervisors 0.001 (0.289) -0.011 (-1.688)* Dummy (Cash Flow Rights) * (Voting Rights – Cash Flow Rights) 0.022 (1.701)* Dummy (Cash Flow Rights) * Proportion of Directorates and Supervisors 0.013 (2.631)*** R 2 (%)16.6915.9517.4015.1916.9018.07

14. 14 Regression of Price-to-Sales Multiple on Corporate Governance Independent Variable Dependent Variable: IPO Price-to-Sale Multiple deflated by Matching Sample Intercept 1.398 (1.343) 1.410 (1.378) 0.445 (0.386) 1.586 (1.523) 1.367 (1.346) 1.513 (1.456) Cash flow Rights 0.008 (1.837)* Voting Rights – Cash Flow Rights -0.027 (-2.336)** -0.037 (-2.544)** Cash Flow Rights / Voting Rights 0.011 (2.138)** Proportion of Directorates and Supervisors -0.0004 (-0.064) 0.010 (-1.072) Dummy (Cash Flow Rights) * (Voting Rights – Cash Flow Rights) 0.022 (1.138) Dummy (Cash Flow Rights) * Proportion of Directorates and Supervisors 0.010 (1.516) R 2 (%)29.0030.4030.0928.4430.8729.28

15. 15 Regression of the Initial Return of IPO on Corporate Governance Independent Variable Dependent Variable: Initial Return of IPO Intercept 19.740 (1.015) 17.551 (0.922) 1.135 (0.053) 18.950 (0.982) 16.726 (0.875) 17.742 (0.920) Cash flow Rights -0.016 (-0.136) Voting Rights – Cash Flow Rights -0.422 (-1.947)* -0.520 (-1.886)* Cash Flow Rights / Voting Rights 0.179 (1.849)* Proportion of Directorates and Supervisors 0.023 (0.185) -0.125 (-0.736) Dummy (Cash Flow Rights) * (Voting Rights – Cash Flow Rights) 0.204 (0.575) Dummy (Cash Flow Rights) * Proportion of Directorates and Supervisors 0.154 (1.292) R 2 (%)11.0812.7812.6211.0912.9311.85

16. 16 Conclusion Ownership structure variables have stronger explanatory power upon the comparable price multiples than upon initial returns of IPO firms. With high cash flow investment in the issuing firms, the C. S. have a strong motive to ask high comparable price multiples.

17. 17 Conclusion However, a deviating ownership structure that the C.S. levers control through cross shareholding or pyramidal structure is negative correlated to comparable price multiples. The negotiation of the offering price is strictly dictated by the controlling shareholder’s wealth effect is implied in the ownership structure of the IPO firm.