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RFS Advance Access published online on August 30, 2007
Review of Financial Studies, doi:10.1093/rfs/hhm036
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

Shareholder Diversification and the Decision to Go Public

Andriy Bodnaruk
University of Maastricht

Eugene Kandel
Hebrew University and CEPR

Massimo Massa
INSEAD

Andrei Simonov
Stockholm School of Economics

Address correspondence to Massimo Massa, Finance Department, INSEAD, Boulevard de Constance, 77305 Fontainebleau Cedex, France, or e-mail: massimo.massa{at}insead.edu

JEL: G120, G140, G240, G320


  Abstract

We study the effects of the controlling shareholders' portfolio diversification on the initial public offering (IPO) process. Less diversified shareholders have more to gain from taking their firm public, and are more willing to accept a lower price for shares. We test these hypotheses using the data on all IPOs in Sweden between 1995 and 2001. Using detailed information on the portfolio composition of shareholders in private and public firms, we construct several proxies of their portfolio diversification and relate them to the probability of the IPO and the underpricing. We show that the less diversified individual shareholders, especially those with lower wealth, sell more of their shares at the IPO. Firms held by less diversified controlling shareholders are more likely to go public, and exhibit higher underpricing. These effects are economically and statistically significant, while the diversification of noncontrolling shareholders has no effect. Our findings suggest that diversification of controlling shareholders plays a prominent role in the IPO process.

We are grateful to Sven–Ivan Sundqvist for numerous helpful discussions and for providing us with the data. We are also grateful to Yakov Amihud, Effi Benmelech, Mike Burkart, Andrew Ellul, Thierry Foucault, Dennis Gromb, Ilan Kremer, Jay Ritter, Andrei Shleifer, Ivo Welch, Andrew Winton, and participants of the ESSFM at Gerzensee in 2004, EFA in Moscow in 2005, FIRS in Shanghai in 2006, WFA in 2006, and seminars at BI (Oslo), Hebrew and Tel Aviv Universities for their helpful comments and suggestions. We thank Michael Borns for expert editorial advice. Andrei Simonov and Andriy Bodnaruk acknowledge financial support from Jan Wallander och Tom Hedelius Stiftelse. Eugene Kandel acknowledges financial support from the Kruger Center for Finance Research at the Hebrew University.


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