Asymmetric Information in the Market for IPOs
48 Pages Posted: 3 Oct 2011 Last revised: 10 Feb 2012
Date Written: September 17, 2011
This study tests the effect of equity retention and management ownership on the relative market value of 337 initial public offerings issued in the U.S. following the passage of the Sarbanes-Oxley Act of 2002 (SOX). The market for IPOs is particularly plagued with asymmetric information problems and it is the interest of this study to test two theories associated with adverse selection and moral hazard: the signaling hypothesis and the agency theory. Because the wealth effect can influence the results of such tests, it is also examined. Though several studies have examined these theories in the context of IPOs, all were prior to the passage and compliance deadlines of SOX, which may have affected the types of firms going public and ultimately the relative importance of the agency, wealth and signaling hypotheses. In contrast to prior studies of similar interest, market-to-book ratios are computed using the first trading day’s closing price as opposed to the offer price. Both econometrically and theoretically, the first trading day’s closing price is preferable to the offer price, particularly for testing the signaling hypothesis. Results are consistent with the signaling and wealth hypotheses, but, in contrast to results of studies conducted prior to SOX, give little credence to the agency theory, suggesting that SOX has, in fact, affected the relative importance of agency problems in the market for IPOs.
Keywords: initial public offering, signaling theory, agency theory, asymmetric information
Suggested Citation: Suggested Citation