We examine how Japanese corporate governance characteristics affect IPO underpricing. The results show that parent ownership does not affect underpricing in IPO firms. We also find that greater CEO ownership is expected to cause principal–principal conflicts and to exacerbate underpricing in IPO firms. Our empirical results also reveal that bank ties mitigate underpricing and function as effective monitoring mechanisms. Furthermore, the positive correlation between CEO ownership and IPO firm underpricing is moderated by the parent–subsidiary relationship. Finally, independent venture capital firms do not mitigate underpricing of IPO firms with parent–subsidiary relationships.
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This study focuses on agency-related hypotheses because we concentrate on the IPO wealth retention effect in line with Certo et al. (2001a). Underpricing is examined from many theoretical perspectives, which are summarized in Certo et al. (2001b) and Ljungqvist (2007). Asymmetric information hypotheses are investigated by Rock (1986) and Beatty and Ritter (1986), while underwriter reputation is explained by Megginson and Weiss (1991). Information revelation motives are developed by Hanley (1993) and Hanley and Wilhelm (1995). The investment banker’s rent-seeking hypothesis is explained by Reuter (2006) and Liu and Ritter (2011), and behavioral explanations are implemented by Welch (1992) and Ljungqvist and Wilhelm (2005).
Under Japanese listing standards, when firms have more than 300 shareholders, there is a higher retail investor allocation ratio (Kutsuna et al. 2010). According to Kutsuna et al. (2010), annual average allocations to individuals ranged from 76.4 to 81.7% during 2002–2005. Thus, the implication of Stoughton and Zechner (1998) that managers of issuing firms could use underpricing to induce more institutional holdings is not applicable in Japanese IPO markets. Tatsumi (2011) explains that both book building and auction systems are adopted in Japanese IPO markets. Under a book building (BB) system, a lottery of new shares is used when oversubscription occurs. Kutsuna et al. (2010) also introduce major investment banks’ IPO share allocation policy. The largest investment bank, Nomura, allocates more than 70% of IPO shares to retail investors. In addition, Daiwa’s allocation policy also restricts allocation to institutional shareholders. The details are summarized in Kutsuna et al. (2010).
One important feature of Japanese parent–subsidiary relationships is Keiretsu (Hoshi et al. 1991). Previous studies of Keiretsu firms show that they receive several benefits from their membership (Kim et al. 2004; McGuire and Dow 2009). Keiretsu firms are centered on larger firms listed on the Tokyo Stock Exchange, and other independent firms in Japan are regarded as non-Keiretsu (Choi and Han 2013). Although Keiretsu members have positive announcement returns for corporate restructuring, smaller non-Keiretsu firms cannot gain this positive return (Choi and Han 2013). On the other hand, there is a negative relationship between parent ownership and subsidiary performance in Japanese corporation spinoffs (Ito and Rose 1994; Sakawa and Watanabel 2018a). Parent firms tend to maintain controlling stakes in listed subsidiaries.
Principal–principal conflicts are the dominant problems. Increased family ownership might reinforce IPO underpricing as family owners tend to exploit firm wealth and neglect other minority shareholders. The family might pursue familial interests at the expense of firm value and the interests of minority shareholders, engendering principal–principal conflicts (Young et al. 2008). In addition, managers act as firm stewards and work for the long-term welfare of the firm under stewardship theory (Davis et al. 1997). Stewardship theory has been applied to family-controlled firms because family executives have close relationships with the firm. Thus, family shareholders have a positive incentive to seek long-term wealth instead of exploiting the other minority shareholders. On the other hand, Yoshikawa and Rasheed (2010) infer that principal–agent conflicts are dominant problems for firms and that principal–principal conflicts are less important in Japanese small- and medium-sized family-controlled firms.
In Japanese IPO markets, underwriter reputation is measured as a dummy for each of the three representative underwriters because their size or reputation is expected to be a signal of quality of investment and risk (Kaneko and Pettway 2003). Kaneko and Pettway (2003) adopted the Big 4 underwriters as reputational underwriters: Nomura, Daiwa, Nikko, and Yamaichi. Our sample period includes the period after the bankruptcy of Yamaichi Co. in 1997. Therefore, we use the Big 3 underwriters: Nomura, Daiwa, and Nikko as reputational underwriters. In addition, 54% of IPOs in our sample are issued by these three representative underwriters.
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We would like to thank Allan Bird, Kiyohiko Ito, Tom Roehl, Elizabeth Rose, and Yoshiro Tsutsui for their valuable comments on earlier drafts, which helped improve this article. This study is financially supported by the Grant-in-Aid for Young Scientists (A) (MEXT/JSPS KAKENHI Grant Number 17H04784), the Grant-in-Aid for Scientific Research (C) (MEXT/JSPS KAKENHI Grant Number 17K03695), and the Grant-in-Aid for Scientific Research (B) (MEXT/JSPS KAKENHI Grant Number 17KT0036). All remaining errors are solely our owns.
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Sakawa, H., Watanabel, N. IPO underpricing and ownership monitoring in Japan. Asian Bus Manage (2019). https://doi.org/10.1057/s41291-019-00067-1
- Agency theory
- Initial public offerings
- Principal–principal conflicts