Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling
Rajesh K. Aggarwal
University of Minnesota - Twin Cities - Carlson School of Management
Kent L. Womack
University of Toronto - Rotman School of Management
AFA 2002 Atlanta Meetings
Managers of firms going public usually do not sell their own shares at the initial public offering. Instead, they often sell a portion of their shares at the end of the lockup period. We develop a model in which the manager strategically underprices the IPO in order to maximize his wealth from selling shares at lockup expiration. First-day underpricing creates information momentum, i.e., it generates incremental comments and recommendations by research analysts, especially by non-lead underwriter analysts. This increased research coverage shifts the demand curve for the stock outwards, allowing the manager to sell shares at the lockup expiration at prices higher than he would otherwise be able to obtain. We test the model on a sample IPOs in the 1990s. We find that managerial share and option holdings are positively correlated with first-day underpricing and that higher first-day underpricing leads to more analyst research coverage. We also find that research coverage is positively correlated with stock price performance through the lockup expiration and with insider selling at the expiration of the lockup. Overall, the empirical results are consistent with the model.
Number of Pages in PDF File: 39
Keywords: IPO, lockup expiration, insider selling, underpricing
JEL Classification: G24, G10, G30working papers series
Date posted: April 26, 2001
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