Innovation Potential, Insider Sales, and IPO Performance: How Firms Can Mitigate the Negative Effect of Insider Selling

Journal of Marketing, 2022

Posted: 17 Nov 2022

See all articles by Zixia (Summer) Cao

Zixia (Summer) Cao

University of Colorado Denver

Reo Song

California State University, Long Beach - College of Business Administration

Alina Sorescu

Texas A&M University - Department of Marketing

Ansley Chua

Independent

Date Written: November 4, 2022

Abstract

At the time of an initial public offering (IPO), firms seek to maximize their stock market value. The authors theorize and show that a firm’s innovation potential— firm outputs and activities that contribute to the development of future new products— can be used by the managers of IPO firms as a credible signal of the quality of the firm. Using a sample of 370 IPO firms from the consumer-packaged goods and pharmaceutical industries, and three metrics of innovation potential, the authors show that firms’ innovation potential is (1) positively associated with the initial value of the IPO and with the first day IPO returns, and (2) negatively associated with the extent to which insiders sell their shares at the time of the IPO. The effectiveness of the three metrics of innovation potential as a signal of firm quality varies: patents have a stronger impact on insider sales than preannouncements and generic references to future innovation, while preannouncements have the strongest impact on first day IPO returns. The paper presents a nuanced view of the extent to which various firm stakeholders consider information about firms’ innovation potential to be a credible signal that reduces the adverse selection present in IPO deals with insider sales.

Keywords: IPO, innovation, insider sales, IPO first day returns, preannouncements, patents

JEL Classification: M1, M3

Suggested Citation

Cao, Zixia and Song, Reo and Sorescu, Alina and Chua, Ansley, Innovation Potential, Insider Sales, and IPO Performance: How Firms Can Mitigate the Negative Effect of Insider Selling (November 4, 2022). Journal of Marketing, 2022, Available at SSRN: https://ssrn.com/abstract=4268683

Zixia Cao (Contact Author)

University of Colorado Denver ( email )

1475 Lawrence St
Denver, CO 80238-3363
United States

Reo Song

California State University, Long Beach - College of Business Administration ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

Alina Sorescu

Texas A&M University - Department of Marketing ( email )

430 Wehner
College Station, TX 77843-4218
United States

Ansley Chua

Independent

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