Managerial Confidence and Initial Public Offerings

Abstract

Initial public offering (IPO) underpricing is positively correlated with managerial confidence. We hypothesize that highly overconfident managers, who tend to overvalue their own firm, use underpricing to signal their beliefs to the market in an effort to receive greater value for their shares in follow-on offerings. Evidence from the subsequent capital raising activities of IPO firms supports this conjecture. However, firms with highly overconfident managers do not consistently outperform firms with less confident managers following their IPO, which suggests that overconfidence is not a proxy for firm quality.

Keywords: Initial public offering (IPO), Managerial optimism, Signaling, Underpricing

JEL Classification: D21, D22, G24, G30