Strategic IPO underpricing, information momentum, and lockup expiration selling

Strategic IPO underpricing, information momentum, and lockup expiration selling Managers usually do not sell any of their own shares in an initial public offering but instead wait until the end of the lockup period. We develop a model in which managers strategically underprice IPOs to maximize personal wealth from selling shares at lockup expiration. First-day underpricing generates information momentum by attracting attention to the stock and thereby shifting the demand curve for the stock outwards. This allows managers to sell shares at the lockup expiration at prices higher than they would otherwise obtain. We test the model on a sample of IPOs in the 1990s. We find that higher ownership by managers is positively correlated with first-day underpricing, underpricing is positively correlated with research coverage, and research coverage is positively correlated with stock returns and insider selling at the lockup expiration. These results are consistent with the model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Strategic IPO underpricing, information momentum, and lockup expiration selling

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Publisher
Elsevier
Copyright
Copyright © 2002 Elsevier Science B.V.
ISSN
0304-405x
D.O.I.
10.1016/S0304-405X(02)00152-6
Publisher site
See Article on Publisher Site

Abstract

Managers usually do not sell any of their own shares in an initial public offering but instead wait until the end of the lockup period. We develop a model in which managers strategically underprice IPOs to maximize personal wealth from selling shares at lockup expiration. First-day underpricing generates information momentum by attracting attention to the stock and thereby shifting the demand curve for the stock outwards. This allows managers to sell shares at the lockup expiration at prices higher than they would otherwise obtain. We test the model on a sample of IPOs in the 1990s. We find that higher ownership by managers is positively correlated with first-day underpricing, underpricing is positively correlated with research coverage, and research coverage is positively correlated with stock returns and insider selling at the lockup expiration. These results are consistent with the model.

Journal

Journal of Financial EconomicsElsevier

Published: Oct 1, 2002

References

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