Do Insiders Knowingly Issue Overvalued Equity? Evidence from Ipos that Get Delisted

53 Pages Posted: 20 Sep 2003

See all articles by Sahiba Chadha

Sahiba Chadha

University of Alabama - Culverhouse College of Commerce & Business Administration

Date Written: August 2003

Abstract

Using a sample of 155 IPOs that delist due to performance-related reasons shortly after going public, this paper sheds light on the motives of entrepreneurs and early investors in taking their firm public. I empirically examine the actions of insiders over the entire public life of the IPO firm in order to understand whether they knowingly sell overvalued equity. I examine the behavior and the trading activities of individuals closest to the firm at the offer stage, after the lock-up expiration, and prior to delisting. I find no evidence that suggests that insiders knowingly issue overvalued equity. The behavior of insiders at the offer and after the lock-up expiration does not offer any evidence of insiders systematically exploiting their private information to gain at the expense of outside investors. Additionally, the results show that insiders of delisted IPOs do not bail out before the firm delists. This is consistent with the evidence found in previous studies of managers being overconfident and unreasonably optimistic regarding their firm's prospects. Alternatively, it is also consistent with the behavior of entrepreneurs being different from that of hired managers; entrepreneurs may be reluctant to let go of their firm even when they realize that the business is doomed. Overall, the results lend support for either the 'hubris' hypothesis or the 'entrepreneurial pride' explanation; they are largely inconsistent with the 'windows of opportunity' hypothesis.

Keywords: Delisting, IPOs, Windows of Opportunity, Hubris, Insider Trading, Lock-ups, Long-run performance

JEL Classification: G14, G24, G32, G33, L21, L25, M13

Suggested Citation

Chadha, Sahiba, Do Insiders Knowingly Issue Overvalued Equity? Evidence from Ipos that Get Delisted (August 2003). Available at SSRN: https://ssrn.com/abstract=437441 or http://dx.doi.org/10.2139/ssrn.437441

Sahiba Chadha (Contact Author)

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-8966 (Phone)
205-348-0590 (Fax)

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