The Determinants of Insiders' Selling at Initial Public Offerings: An Empirical Analysis

Abstract

The paper examines the effect of information asymmetry on equity selling by pre-IPO shareholders as part of the offering. Consistent with the implications of models that use equity retention as a signaling mechanism, the magnitude of selling is positively related to the firm age, size and the underwriter's reputation. In addition, insiders that are more likely to possess private information about the firm prospects sell almost no shares at the offer itself but often use the over-allotment option as a second stage mechanism for selling equity. However, the cross sectional variation in sales of secondary shares is primarily affected by the magnitude of the price revision during the "road show" and by the likelihood the firm would conduct a seasoned equity offering soon after the IPO.

Keywords: insiders, IPO, secondary shares, information asymmetry

JEL Classification: G10, G14, G30, G32