Executive Stock Options and IPO Underpricing

39 Pages Posted: 21 Jun 2005

See all articles by Michelle Lowry

Michelle Lowry

Drexel University

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Date Written: August 1, 2006


In about one-third of US IPOs between 1996 and 2000, executives received stock options with an exercise price set equal to the IPO offer price (rather than a price determined by the market). Among firms with such "IPO options", 58 percent of top executives receive a net gain from underpricing, meaning the gain from IPO options exceeds the loss from the dilution of their pre-IPO shareholdings. If executives can influence the IPO offer price, we expect a positive relation between these IPO options and underpricing. Alternatively, executives may be able to influence the timing and terms of their stock options, and this would similarly predict a positive relation between IPO options and underpricing. However, we fail to find any evidence of such a relation. Our results run counter to the emerging literature claiming that managers blatantly take self-serving actions to improve their personal welfare at shareholder expense.

Keywords: Initial public offering; IPO underpricing; Executive compensation; Stock options

JEL Classification: G24, G32, J33

Suggested Citation

Lowry, Michelle B. and Murphy, Kevin J., Executive Stock Options and IPO Underpricing (August 1, 2006). Available at SSRN: https://ssrn.com/abstract=745684 or http://dx.doi.org/10.2139/ssrn.745684

Michelle B. Lowry (Contact Author)

Drexel University ( email )

Philadelphia, PA 19104
United States
215-895-6070 (Phone)

Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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