Asymmetric Information in the Market for IPOs

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 evidence exists 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.

Keywords: {'name': 'Initial Public Offerings, Asymmetric Information, Firm Valuation, Ownership Structure, Government Regulation'}

Authors & affiliations

Heather N Rhodes
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

DOI: 10.1111/j.1755-053X.2009.01035.x

DOI: 10.1016/0165-4101(96)00421-1

DOI: 10.1016/0304-405X(90)90064-7

DOI: 10.1016/1057-5219(93)90009-7

DOI: 10.1016/0304-405X(86)90057-7

Block, S.B. (2004). The latest movement to going private: An empirical study. Journal of Applied Finance, 14, 36-44.

DOI: 10.1016/j.jacceco.2004.04.002

DOI: 10.1111/j.1540-6261.1990.tb02426.x

DOI: 10.1162/003465302317331982

DOI: 10.1111/j.1540-6261.1982.tb01091.x

DOI: 10.1016/j.jacceco.2006.07.002

Firth, M. (1992). Entrepreneurial shareholdings, signaling and the valuation of unseasoned new issues. International Journal of Finance, 5, 306-319.

DOI: 10.1017/S0022109014000015

DOI: 10.1016/0165-4101(93)90007-3

DOI: 10.1016/0165-4101(86)90014-5

DOI: 10.1016/0304-405X(76)90026-X

DOI: 10.1080/096031097333862

DOI: 10.1016/S0378-4266(96)00012-X

DOI: 10.2307/2330775

DOI: 10.1086/261970

DOI: 10.2307/2326770

DOI: 10.1111/1540-6261.00543

Loughran, T., & Ritter, J. (2004). Why has underpricing changed over time? Financial Management, 33, 5-37.

DOI: 10.1016/0304-405X(90)90069-C

DOI: 10.1111/j.1540-6261.1991.tb03770.x

DOI: 10.1016/0304-405X(88)90048-7

Morgenstern, M., & Nealis, P. (2004). The impact of Sarbanes-Oxley on mid-cap issuers. Standard & Poor’s Review of Securities & Commodities Regulation 37.

Rhodes, H., & Ligon, J.A. (2018). Regulatory corporate governance and the valuation of IPO firms. Working Paper, University of North Alabama.

DOI: 10.1111/j.1540-6261.1984.tb03907.x

DOI: 10.1016/0304-405X(92)90029-W

DOI: 10.2307/1912934

DOI: 10.1016/j.jcorpfin.2007.03.001