Leverage, Pre-IPO Insider Ownership, and Underpricing: High-Tech versus Low-Tech IPOs

Management Decision, Vol. 46, No. 1, March 2008

Posted: 16 Jan 2009

See all articles by Jaemin Kim

Jaemin Kim

Fowler College of Business

Kuntara Pukthuanthong

University of Missouri, Columbia

Thomas John Walker

Concordia University, Quebec - Department of Finance

Date Written: January 13, 2009

Abstract

The extant literature on initial public offerings (IPOs) generally assumes that a high degree of pre-IPO leverage serves as a positive signal of firm quality as it forces a firm's managers to adhere to tough budget constraints. Our paper questions the validity of this assumption when it is indiscriminately applied to all firms, while other potentially important determinants of a firm's optimal capital structure are ignored. We focus specifically on high-tech versus low-tech firms and find that debt only serves as a signal of better firm quality for low-tech IPOs, as reflected in smaller price revisions and lower underpricing. For high-tech IPOs, the effect of leverage is reversed: for these firms, higher leverage is associated with increased risk and uncertainty as reflected by higher price revisions and greater underpricing. Our results remain significant after controlling for various firm and offer characteristics, market and industry returns, and potential endogeneity between investment bank rankings, price revisions, and underpricing.

Keywords: Pricing, Investments, Capital, Stock markets

JEL Classification: G24, G32, G39

Suggested Citation

Kim, Jaemin and Pukthuanthong, Kuntara and Walker, Thomas John, Leverage, Pre-IPO Insider Ownership, and Underpricing: High-Tech versus Low-Tech IPOs (January 13, 2009). Management Decision, Vol. 46, No. 1, March 2008. Available at SSRN: https://ssrn.com/abstract=1326776

Jaemin Kim

Fowler College of Business ( email )

San Diego State University
5500 Campanile Drive
San Diego, CA 92182-8236
United States
619-594-2721 (Phone)

Kuntara Pukthuanthong (Contact Author)

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

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