Brennan and Franks (1997) and Stoughton and Zechner (1998) provide contrasting arguments for why monitoring considerations create incentives for managers to underprice their firms' IPOs (initial public offerings). Like Smart and Zutter (2003), we examine these arguments using a sample of U.S. IPOs. However, we find evidence that the determinants of initial returns, institutional shareholdings, and post-IPO likelihood of acquisition are not consistent with these arguments. Thus, we conclude that monitoring considerations are not important determinants of IPO underpricing.EVIDENCE THAT THE PRICES OF UNSEASONED NEW ISSUES of common stock (IPOs) in early secondary market trading are substantially higher, on average, than their offer prices has evoked an extensive literature trying to explain such underpricing. While prior literature has tended to focus on uncertainty/asymmetric information stories for such underpricing (e.g., Rock (1986) and Benveniste and Spindt (1989)), recent literature has suggested that post-IPO ownership considerations are also important. More specifically, this literature has suggested that monitoring considerations create incentives for managers to underprice their firm's stock in its first public offering. Brennan and Franks (1997), for example, argue that insiders have an incentive to underprice the IPO of their firm's stock in order to ensure its wide distribution, thereby reducing the likelihood of being monitored or removed by new shareholders, particularly institutional shareholders. Brennan and Franks call their hypothesis the reduced monitoring hypothesis. Consistent with their hypothesis, for a sample of 69 U.K. IPOs during 1986 to 1989, they find that:(1) Smaller applicants are allocated a larger share of oversubscribed/underpriced issues, and (2) the size and amount of subsequent outside large shareholdings are inversely related to the firm's degree of IPO underpricing. 1 * Onur Aruǧaslan is from Western Michigan University, Douglas O. Cook is from the University of Alabama and Robert Kieschnick is from the University of Texas at Dallas. The authors wish to thank an anonymous referee, Rick Green (the editor), Ted Day, Larry Merville, Suresh Radhakrishnan, Scott Smart, Harry Turtle (FMA discussant), and Yexiao Xu for their suggestions for improving this paper. Cook acknowledges the partial support of a summer grant from the Robert M. Hearin Support Foundation.1 They examine the fraction of outside (nonaffiliated) holdings held by the largest outside shareholder and the fraction of outside holdings held by all large shareholders, where "large" shareholders are shareholders with more than 3% of the firm's stock. 2403

Purpose -This paper aims to evaluate the risk-adjusted performance of US-based international equity funds using objective statistical measures grounded in modern portfolio theory, and to present the results in a manner which is easily understood by the average investor. Design/methodology/approach -This study evaluates the performance of 50 large US-based international equity funds using risk-adjusted returns during 1994-2003. In particular, a relatively new risk-adjusted performance measure (M squared), first proposed by Franco Modigliani and Leah Modigliani in 1997, is used to evaluate these equity funds. Findings -The empirical results show that the funds with the highest average returns may lose their attractiveness to investors once the degree of risk embedded in the fund has been factored into the analysis. Conversely, some funds, whose average (unadjusted) returns do not stand out, may look very attractive once their low risk is factored into their performance. Research limitations/implications -It may be worthwhile to examine the effects of factors such as fund manager compensation, service fees, corporate governance metrics, and overweighting in risky countries/regions on the performance of international equity funds. Practical implications -The evidence presented in this study can be used as input in decision making by investors who are exploring the possibility of participating in the global stock market via international equity funds. Originality/value -This paper is one of the first studies that apply the new M squared measure to evaluate the performance of international equity funds using both domestic and international benchmark indices. Various other performance metrics are also utilized including Sharpe and Treynor measures, and Jensen's Alpha.

PurposeThis paper seeks to evaluate the risk‐adjusted performance of the largest US‐based equity mutual funds using rigorous analysis grounded in modern portfolio theory and present the results in a manner which is comprehensible to a lay investor.Design/methodology/approachThis study evaluates the performance of the 20 largest US‐based mutual funds using risk‐adjusted returns during 1995‐2004. In particular, a relatively new risk‐adjusted performance measure by Modigliani and Modigliani is used to evaluate these equity funds. This study also utilizes a variation of the Sortino Ratio to account for downside risk.FindingsThe results show that the funds with the highest returns may lose their attractiveness once the degree of risk had been factored into the analysis. Conversely, some funds may look very attractive once their low risk is factored into their performance.Research limitations/implicationsFuture researchers may want to investigate the effects of factors, such as fund manager, compensation, service fees, corporate governance metrics, and overweighting in risky industries on the performance of mutual funds.Practical implicationsThe empirical evidence presented in this study can be used as input in decision making by investors who are exploring the possibility of participating in the stock market via large mutual funds, but are not sure of what selection criteria to employ.Originality/valueThe paper is one of the first studies that apply the new M2 measure to evaluate the performance of mutual funds. Various other performance metrics are also utilized including the Sharpe, Sortino, Treynor measures and Jensen's α.

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Purpose The purpose of this paper is to examine what is weighted more by the investors when valuing a dual-class firm’s stock – greater agency costs or better accrual quality of the dual-class firm in contrast to the single-class firm. Design/methodology/approach Using the financial data of firms issuing multiple classes of stock (hereafter dual-class firms) and firms issuing single class of stock (hereafter single-class firms), the authors measure the effect of firm’s ownership structure (dual class versus single class) on the earnings response coefficients (ERCs) of prior, current and future period earnings. Findings The authors find that investors care more about agency costs than the quality of accruals in evaluating the earnings of dual-class firms. Specifically, the authors find that current annual returns of the firm are negatively associated with dual-class ownership structure and that earnings informativeness and predictability are decreasing in dual-class ownership of the firm as reflected in decreasing ERCs. Originality/value This study adds to prior literature on dual-class ownership which reports greater agency costs and better accrual quality at dual-class firms in contrast to single-class firms. This study contributes to the literature on earnings informativeness and predictability by evaluating the effect of ownership structure on the ERCs of the firm. Investors should be careful when valuing a dual-class firm and should consider agency costs in addition to accrual quality of reported earnings at such firms.