Monitoring as a Motivation for IPO Under Pricing (Other (Not Listed) Sample)

MONITORING AS A MOTIVATION FOR IPO UNDER PRICING
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During an Initial Public Offer (IPO), insiders make several considerations that would enable them meet their goals. One of the considerations made by the insiders is under-pricing of the Issue. Under-pricing generates excess demand, which leads to biased rationing against large investors who usually have an incentive when it comes to monitoring the firm.
This is often witnessed in Dual-Class IPOs, where despite the insiders wanting to invite investors, they always wish to retain a say in the decision making process thus insulating themselves from outside control . Dual-Class unlike Single-Class IPOs shield the firm from being an acquisition target since the outsiders voting power is curtailed.
Brennan and Franks thus developed the reduced monitoring hypothesis after observing that insiders due to the fear of being monitored or removed by the new shareholders usually under-price the new shares thus ensuring that smaller investors are allocated a larger share of the issue and thus by the principle of one-share, one-vote the few large investors would have less say in the firms decision making.
In contrast, Stoughton and Zecher argued that for insiders wishing to maximize the firm's value will usually ration IPO shares being allocated to the smaller investors. According to them, the firm's revenues more of increase with outside monitoring thus the increased monitoring Hypothesis.
The research conducted by Arugaslan, Cook and Kieschnick on the contrary arrives with different conclusions about the role of monitoring in IPO under-pricing including that; dual class IPOs are under-priced than single c