Controlling Ownership, Employee Ownership, and Returns of IPO Stocks

Using the data from initial public offerings (IPO) on the KOSDAQ Market of Korea from 2003 to 2008, we examine the effect of controlling ownership and employee ownership on the returns of IPO stocks. Initial returns of IPO stocks are positively associated with controlling ownership, indicating that investors tend to be compensated for their concern of the controlling party’s entrenchment effect. Initial returns are positively associated with employee ownership when the largest individual (family) shareholder’s ownership is not high enough to completely control the firm. The result suggests that investors are also compensated for the risk of alliance between the largest individual (family) shareholder and employees. One-year post-IPO stock returns are negatively associated with controlling ownership and positively associated with employee ownership. The results indicate that during the one-year aftermarket period high controlling ownership is considered to increase conflict between controlling shareholders and general shareholders while high employee ownership is considered to enhance worker motivation and so to align the interest of employees with that of general shareholders. On the date of IPO, however, we fail to find evidence of the latter.