Investigating the Relationship Between IPO Type and Firm Returns

Abstract

Recently, dual class IPOs have been gaining popularity. The rise in popularity of dual class IPOs can be attributed to its growing popularity amongst technology firms and foreign companies. The growth of dual class IPOs has also stirred concern from institutional investors that view dual class IPOs as unfair in terms of voting rights and a strict departure from traditional single class IPOs. Institutional investors view dual class IPOs as value destroying from entrenched management, high executive compensation, and excessive mergers and acquisitions. On the contrary, firm founders and early investors argue that they are value adding as they provide insulation from Wall Street earnings pressure and takeover defense from activist investors. This study examines whether single class IPOs outperform dual class IPOs by shorting dual class IPOs and longing single class IPOs. The findings show significant negative alpha for five-year, value-weighted portfolios regressed on the market and the Fama-French three factors. The significant negative alpha provides evidence that dual class IPOs outperform single class IPOs.