Recent papers have proposed a link between underpricing of an initial public offering (IPO) and the resulting ownership structure of the firm. Brennan and Franks [J. Financ. Econ. 45 (1997) 391] hypothesize that IPO managers want to discourage new blockholdings to reduce the likelihood of being monitored. They show that underpricing encourages oversubscription, allowing discrimination against large blockholders. Conversely, Stoughton and Zechner [J. Financ. Econ. 49 (1998) 45] hypothesize that managers underprice to encourage investment by blockholders who provide monitoring services. We find that the link between underpricing and ownership structure is weak. Most firms have outside blocks in place at the IPO and retain them afterwards. In terms of acquiring new blockholders, there is no difference between firms that underprice and those that do not.

This paper analyzes the relation between bidder gains and the source of financing funds available. We document that after controlling for the form of payment, financing decisions during the year before a takeover play an important role in explaining the cross section of bidder gains. Bidder announcement period abnormal returns are positively and significantly related to the amount of ex ante equity financing. This relation is particularly strong for high q firms. We further report a negative and significant relation between bidder gains and free cash flow. This relation is particularly strong for firms classified as having poor investment opportunities. The amount of debt financing before a takeover announcement is not significantly related to bidder gains. Together, we take these findings as supportive of the pecking-order theory of financing and the free cash flow hypothesis.

In this paper, we present a case study of underwriter trading in the aftermarket of a recent initial public offering (IPO). The lead underwriter for this issue actively repurchased approximately 15% of the issue size to cover its initial short position. Detailed audit-trail and short-covering data identify the timing, volume, and counterparties for the Lead's trades. We find that price-support objectives are important on the first two short-covering days. Subsequently, repurchases appear to be governed primarily by their profitability and market liquidity. The Lead incurs lower transaction costs than other large traders, but provides substantial liquidity to the market.