Signaling and the Valuation of Unseasoned New Issues: A Comment

Signaling and the Valuation of Unseasoned New Issues: A Comment ABSTRACT In the March 1982 issue of this Journal, David Downes and Robert Heinkel (1) present an empirical examination of the role of signaling in the valuation of initial public offerings of common stock. For a large sample of unseasoned new issues, they examine the Leland‐Pyle (2) signaling hypothesis that firm value should be positively related to the fraction of equity retained by the original shareholders. Downes and Heinkel conclude that the data are consistent with the Leland‐Pyle signaling hypothesis. In this comment, I present a more complete test of the Leland‐Pyle signaling model. I also present two alternative explanations for the positive empirical relation between firm value and insider holdings, which I label the agency hypothesis and the wealth effect hypothesis. I find that the testable implications of the agency hypothesis are supported, while the evidence is ambiguous with respect to the testable implications of the wealth effect and signaling hypotheses. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Signaling and the Valuation of Unseasoned New Issues: A Comment

The Journal of Finance, Volume 39 (4) – Sep 1, 1984

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Publisher
Wiley
Copyright
1984 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1984.tb03907.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT In the March 1982 issue of this Journal, David Downes and Robert Heinkel (1) present an empirical examination of the role of signaling in the valuation of initial public offerings of common stock. For a large sample of unseasoned new issues, they examine the Leland‐Pyle (2) signaling hypothesis that firm value should be positively related to the fraction of equity retained by the original shareholders. Downes and Heinkel conclude that the data are consistent with the Leland‐Pyle signaling hypothesis. In this comment, I present a more complete test of the Leland‐Pyle signaling model. I also present two alternative explanations for the positive empirical relation between firm value and insider holdings, which I label the agency hypothesis and the wealth effect hypothesis. I find that the testable implications of the agency hypothesis are supported, while the evidence is ambiguous with respect to the testable implications of the wealth effect and signaling hypotheses.

Journal

The Journal of FinanceWiley

Published: Sep 1, 1984

References

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