IDEAS home Printed from https://ideas.repec.org/a/rbs/ijfbss/v7y2018i3p01-19.html
   My bibliography  Save this article

Asymmetric Information in the Market for IPOs

Author

Listed:
  • Heather Rhodes

    (Department of Economics & Finance, University of North Alabama, Florence, AL, USA)

Abstract

This study utilizes hand-collected ownership data to re-examine the signaling, agency and wealth effect theories in a matched-sample of initial public offerings (IPOs) issued in the U.S. prior to and following the passage of the Sarbanes-Oxley Act of 2002 (SOX). SOX provides some motivation for revisiting these topics because evidenceexists that it may have affected the types of firms going public and ultimately the relatively importance of adverse selection and moral hazard, the asymmetric information problems with which these theories are concerned. Results on both the pre-and post-SOX samples are consistent with the signaling theory and evidence of a wealth effect exists in both eras. However, in contrast to results of studies conducted prior to SOX, both the pre-and post-SOX results give little credence to the agency theory, suggesting that SOX has not impacted investors’ concerns regarding moral hazard. Rather, the difference between the pre-SOX results and the results of previous studies suggests that SOX appeared to reduce moral hazard concerns only through its effect on the self-selection of firms going public.That is, SOX appears to have affected the types of firms going public and prohibited firms with greater moral hazard problems from accessing public equity markets.

Suggested Citation

  • Heather Rhodes, 2018. "Asymmetric Information in the Market for IPOs," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 7(3), pages 01-19, July.
    • Handle: RePEc:rbs:ijfbss:v:7:y:2018:i:3:p:01-19
    as

    Download full text from publisher

    File URL: https://www.ssbfnet.com/ojs/index.php/ijfbs/article/view/114/183
    Download Restriction: no
    File URL: https://www.ssbfnet.com/ojs/index.php/ijfbs/article/view/114
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alexander Ljungqvist & William J. Wilhelm, 2003. "IPO Pricing in the Dot‐com Bubble," Journal of Finance, American Finance Association, vol. 58(2), pages 723-752, April.
    2. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
    3. Carter, Richard B & Manaster, Steven, 1990. "Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    4. Ritter, Jay R, 1984. "Signaling and the Valuation of Unseasoned New Issues: A Comment," Journal of Finance, American Finance Association, vol. 39(4), pages 1231-1237, September.
    5. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    6. Krinsky, I. & Rotenberg, W., 1989. "Signalling and the Valuation of Unseasoned New Issues Revisited," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(2), pages 257-266, June.
    7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    8. Keloharju, Matti & Kulp, Kaj, 1996. "Market-to-book ratios, equity retention, and management ownership in Finnish initial public offerings," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1583-1599, November.
    9. Gao, Xiaohui & Ritter, Jay R. & Zhu, Zhongyan, 2013. "Where Have All the IPOs Gone?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(6), pages 1663-1692, December.
    10. Bushee, Brian J. & Leuz, Christian, 2005. "Economic consequences of SEC disclosure regulation: evidence from the OTC bulletin board," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 233-264, June.
    11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    12. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    13. Gaver, Jennifer J. & Gaver, Kenneth M., 1993. "Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 125-160, April.
    14. Downes, David H & Heinkel, Robert, 1982. "Signaling and the Valuation of Unseasoned New Issues," Journal of Finance, American Finance Association, vol. 37(1), pages 1-10, March.
    15. Hughes, Patricia J., 1986. "Signalling by direct disclosure under asymmetric information," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 119-142, June.
    16. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    17. Megginson, William L & Weiss, Kathleen A, 1991. "Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    18. Wintoki, M. Babajide, 2007. "Corporate boards and regulation: The effect of the Sarbanes-Oxley Act and the exchange listing requirements on firm value," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 229-250, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dong, Xiuliang & Wang, Yiqun & Zhang, Jiaming & Liu, Jianing, 2024. "Sponsor Co-investment, inquiry divergence, and IPO pricing efficiency," Finance Research Letters, Elsevier, vol. 62(PA).
    2. Heather Rhodes & James A. Ligon, 2019. "Regulatory Corporate Governance and the Valuation of IPO Firms," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 8(2), pages 18-56, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kevin Keasey & Helen Short, 1997. "Equity retention and initial public offerings: the influence of signalling and entrenchment effects," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 75-85.
    2. Heather Rhodes & James A. Ligon, 2019. "Regulatory Corporate Governance and the Valuation of IPO Firms," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 8(2), pages 18-56, April.
    3. Keloharju, Matti & Kulp, Kaj, 1996. "Market-to-book ratios, equity retention, and management ownership in Finnish initial public offerings," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1583-1599, November.
    4. Catherine M. Daily & S. Trevis Certo & Dan R. Dalton & Rungpen Roengpitya, 2003. "IPO Underpricing: A Meta–Analysis and Research Synthesis," Entrepreneurship Theory and Practice, , vol. 27(3), pages 271-295, July.
    5. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    6. Harvey, Campbell R. & Lins, Karl V. & Roper, Andrew H., 2004. "The effect of capital structure when expected agency costs are extreme," Journal of Financial Economics, Elsevier, vol. 74(1), pages 3-30, October.
    7. Roosenboom, Peter & van der Goot, Tjalling, 2005. "The effect of ownership and control on market valuation: Evidence from initial public offerings in The Netherlands," International Review of Financial Analysis, Elsevier, vol. 14(1), pages 43-59.
    8. Hutchinson, Marion & A Gul, Ferdinand, 2006. "The effects of executive share options and investment opportunities on firms’ accounting performance: Some Australian evidence," The British Accounting Review, Elsevier, vol. 38(3), pages 277-297.
    9. James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    10. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    11. Tatiana Fedyk & Zvi Singer & Mark Soliman, 2017. "The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms," Review of Accounting Studies, Springer, vol. 22(4), pages 1541-1581, December.
    12. Chau, Gerald & Gray, Sidney J., 2010. "Family ownership, board independence and voluntary disclosure: Evidence from Hong Kong," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 19(2), pages 93-109.
    13. Benson, Bradley W. & Chen, Yu & James, Hui L. & Park, Jung Chul, 2020. "So far away from me: Firm location and the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 64(C).
    14. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol & Pagano, Michael S., 2003. "Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 417-447, March.
    15. Muniandy, Balachandran & Hillier, John, 2015. "Board independence, investment opportunity set and performance of South African firms," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 108-124.
    16. Chen, I-Ju, 2014. "Financial crisis and the dynamics of corporate governance: Evidence from Taiwan's listed firms," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 3-28.
    17. Cui, Huimin & Mak, Y. T., 2002. "The relationship between managerial ownership and firm performance in high R&D firms," Journal of Corporate Finance, Elsevier, vol. 8(4), pages 313-336, October.
    18. Arthur, N., 2001. "Board composition as the outcome of an internal bargaining process: empirical evidence," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 307-340, September.
    19. Reber, Beat & Vencappa, Dev, 2016. "Deliberate premarket underpricing and aftermarket mispricing: New insights on IPO pricing," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 18-33.
    20. McGuinness, Paul B., 2014. "IPO firm value and its connection with cornerstone and wider signalling effects," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 138-162.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rbs:ijfbss:v:7:y:2018:i:3:p:01-19. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Hasan Dincer (email available below). General contact details of provider: https://edirc.repec.org/data/ssbffea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.