Insider Selling and IPO Price Premium

ABSTRACT

We examine insider selling for initial public offering (IPO) firms using a sample of 1868 IPOs between 1988 and 2012. We find that overvalued IPOs have higher probability of offering secondary shares, higher proportion of secondary shares offered, and more upward revision in the total number of shares offered. They also have higher probability of insider sale in the open market both before and after lockup expiration. The size of insider sale in the open market also increases with the degree of overvaluation. The results are consistent with the hypothesis that IPO insiders try to sell their shares opportunistically into overvalued markets.

KEY WORDS:

• insider
• IPO
• overoptimism
• price premium
• reservation price

JEL CLASSIFICATION CODE:

• G14
• G30
• G32

Notes

1. According to the filing requirements of Section 16 of the Exchange Act of 1934 and Section 403 of the Sarbanes–Oxley Act of 2002, insiders are defined as a company’s directors, officers, and any beneficial owners of more than 10% of a class of the company’s equity securities. In this article, we use insiders and owner-manager interchangeably for IPO firms.

2. See Li and Zheng (2016) for detailed explanation about why the lower limit of the initial IPO filing price range may be a proxy for IPO issuers’ reservation price and the intrinsic value in IPO issuers’ perception.

3. Thomson Reuters SDC Platinum starts collecting lockup information since 1988.

Additional information

Funding

Steven X. Zheng acknowledges the financial support from BMO Professorship in Finance at University of Manitoba.