Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling

39 Pages Posted: 26 Apr 2001

See all articles by Rajesh K. Aggarwal

Rajesh K. Aggarwal

Northeastern University

Laurie Krigman

Babson College

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Date Written: April 2001

Abstract

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.

Keywords: IPO, lockup expiration, insider selling, underpricing

JEL Classification: G24, G10, G30

Suggested Citation

Aggarwal, Rajesh K. and Krigman, Laurie and Womack, Kent L., Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling (April 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=266956 or http://dx.doi.org/10.2139/ssrn.266956

Rajesh K. Aggarwal

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Laurie Krigman (Contact Author)

Babson College ( email )

Finance Division
321 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4246 (Phone)

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

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