Insider trading, pricing and the long-run performance of IPOs: evidence from the French market during the high-tech bubble

Abstract

This article empirically examines the relationship between insider (entrepreneurs and venture capitalists) trading and underpricing and long-run performance in a sample of 120 initial public offerings (IPOs) that took place on the Nouveau Marché in France during the high-tech bubble. We hypothesize that insiders were better informed than the market about the future prospect of the firms, particularly during the high-tech bubble characterized by strong information asymmetry. Trading activity was measured at the IPO date and over a three-year period after this date. We find no evidence suggesting that entrepreneurs and venture capitalists knowingly issue overvalued equity at the IPO date. However, there is weak, but statistically significant, evidence that suggests that entrepreneurs and venture capitalists acquire private information during the first years of flotation and have the ability to take advantage of it by selling overvalued equity. Both these types of insider seem to be the best informed on the future value of the firm. However, changes in ownership of banks and other shareholders are not followed by significant change in the firm's long term value.

Keywords:

• initial public offerings
• insiders' holding
• entrepreneurs
• venture capitalists
• long-run performance
• legal thresholds

Acknowledgements

I would like to thank the participants at the 2005 EFMA meeting in Milan (Italy), especially Carol Boyer (the speaker), the 2005 International Finance Conference in Hammamet (Tunisia), and the IRG seminars at Paris XII University. I am grateful to Jean-Pierre Couderc (ENSA) for providing me with his data.

Notes

 1. Since the 2005-811 Law, only managers have to declare their trades on the shares of their company.

 2. The lockup agreement restricts firm insiders from selling retained shares for a set period following opening day.

 3. The Nouveau Marché specializes in the flotation of high growth potential firms in France.

 4. Zaabar (2003) analyzes the effect of a change in ownership concentration levels on the value of firms by examining market reaction to the announcement of the crossing of various legal thresholds of capital. A brief review of the French Law relating to the mandatory disclosure of the crossing of thresholds is presented in the Appendix.

 5. These documents are downloadable from http://www.amf-france.org.

 6. These crossed legal thresholds represent purchase and sale trades and will be referred to by this name (trades) in the following sections.

 7. The use of proceeds seems to influence the value of a firm. Leone, Rock, and Willenborg (2003) show that the planned use of proceeds to pay off debt or to invest for the long term is associated with less underpricing.

 8. Tech stocks are defined as those in the internet, telecommunications, software/computer services, and biotechnology industries. For the other industries, classification depends on the specificity of the firm.

 9. In fixed assets or research and development; deleveraging is very marginal in our sample.

10. Our result is also not consistent with the findings of Mikkelson and Shah (1997). These authors find that insider sales at the IPO date are negatively associated with long-run accounting operating performance. They argue that insiders are able to take advantage of an opportunity window to carry out the IPOs before performance declines.