Founders, Private Equity Investors, and Underpricing in Entrepreneurial IPOs

20 Pages Posted: 4 Jul 2009

See all articles by Garry D. Bruton

Garry D. Bruton

Texas Christian University - M.J. Neeley School of Business

Salim Chahine

American University of Beirut - Olayan School of Business

Igor Filatotchev

City University London - Sir John Cass Business School

Abstract

One of the most important events in the life of an entrepreneurial firm is when it undergoes an initial public offering (IPO). Combining signaling theory with research on the role of information asymmetry in pricing of IPOs this study examines the performance outcomes of two distinct types of agency conflicts at the time of the IPO: adverse selection and moral hazard. Empirical results show a curvilinear (U-shaped) relationship between founders' retained equity and underpricing. This suggests that founders' retained ownership in an entrepreneurial IPO limits adverse selection problems and the associated IPO underpricing; however, at some point entrepreneurs' investment and risk become so great that entrepreneurs may no longer act rationally and moral hazard increases. Empirical findings also indicate that the retained ownership of business angels has a stronger mitigating effect on adverse selection and moral hazard problems than do venture capitalist investors.

Suggested Citation

Bruton, Garry and Chahine, Salim and Filatotchev, Igor, Founders, Private Equity Investors, and Underpricing in Entrepreneurial IPOs. Entrepreneurship Theory and Practice, Vol. 33, Issue 4, pp. 909-928, July 2009. Available at SSRN: https://ssrn.com/abstract=1429082 or http://dx.doi.org/10.1111/j.1540-6520.2009.00309.x

Garry Bruton (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Department of Management
Fort Worth, TX 76129
United States
817-257-7421 (Phone)
817-257-7227 (Fax)

Salim Chahine

American University of Beirut - Olayan School of Business ( email )

Bliss Street
Beirut 1107 2020
Lebanon
961-1-374-374 (Phone)

Igor Filatotchev

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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