Under-Diversification and Retention Commitments in IPOs

Courteau, Lucie

doi:10.2307/2331274

Cited by 66 publications

(56 citation statements)

References 17 publications

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“…First, Welch (1989), Allen and Faulhaber (1989), and Chemmanur (1993) model that only good firms can afford to dissipate wealth by underpricing. Second, Courteau (1995) and Brau, Lambson, and McQueen (2005) model that insiders who commit to a long lockup-a period of time after the IPO in which insiders agree not to sell personal shares-signal firm quality. Third, Teoh, Welch, and Wong (1998) suggest that a history of strong earnings signals future strong performance.…”

Section: Signaling In Iposmentioning

confidence: 99%

Initial Public Offerings: An Analysis of Theory and Practice

Brau¹,

Fawcett

2006

The Journal of Finance

649

264

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We survey 336 chief financial officers (CFOs) to compare practice to theory in the areas of initial public offering (IPO) motivation, timing, underwriter selection, underpricing, signaling, and the decision to remain private. We find the primary motivation for going public is to facilitate acquisitions. CFOs base IPO timing on overall market conditions, are well informed regarding expected underpricing, and feel underpricing compensates investors for taking risk. The most important positive signal is past historical earnings, followed by underwriter certification. CFOs have divergent opinions about the IPO process depending on firm-specific characteristics. Finally, we find the main reason for remaining private is to preserve decision-making control and ownership. Copyright 2006 by The American Finance Association.

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Section: Signaling In Iposmentioning

confidence: 99%

Initial Public Offerings: An Analysis of Theory and Practice

Brau¹,

Fawcett

2006

The Journal of Finance

649

264

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“…Prior studies have shown, both analytically and empirically, that signals such as the retention of a significant percentage of firm ownership (Leland and Pyle, 1977;Datar, Feltham, and Hughes, 1991;Courteau, 1995) or the hiring of underwriters and/or auditors of prestige (Beatty and Ritter, 1986;Feltham, Hughes, and Simunic, 1991;Clarkson and Simunic, 1994;Bédard, Coulombe, and Courteau, 2000) can convince potential shareholders of the quality of the issue, thus reducing the need for underpricing. Recent studies suggest that the structure of the board of directors may also be used as a signal of quality of the issuing firm (Certo, Daily, and Dalton, 2001a;Filatotchev and Bishop, 2002).…”

Section: Introductionmentioning

confidence: 99%

Audit Committee, Underpricing of IPOs, and Accuracy of Management Earnings Forecasts

Bédard

Coulombe

Courteau

2008

Corporate Governance

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Manuscript Type: EmpiricalResearch Question/Issue: This paper examines the role of audit committees (AC) in the initial public offering (IPO) process in a governance environment where AC best practices are well established but their adoption is voluntary. We consider the creation and characteristics of the committee as signals that issuing firms can use to reduce the underpricing often associated with IPOs. We also examine the effect of the committee on the quality of management earnings forecasts included in the prospectus. Research Findings/Results: Our empirical analysis is performed on a sample of 246 IPOs issued in the Canadian province of Québec. We find that the creation of an AC at the time of the IPO has no effect on underpricing unless its members are independent and have expertise in financial matters, in which case it decreases significantly the level of underpricing of the IPO. However, we find no significant association between these two governance attributes and the accuracy of forecasts included in prospectuses. Theoretical Implications: Our results suggest that the AC is a credible signal that could be used in the firm's signaling strategy and the results provide support for the monitoring role of the board of directors, as proposed by the agency theory. Practical/Policy Implications: Our results support the worldwide movement in legislations requiring AC independence and expertise. They stress the importance of the presence of qualified members on the AC with sufficient knowledge of accounting and finance.

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“…If the lockup behavior cannot be mimicked by low quality firms, insiders may desire the lockup as it signals high quality to the market. Courteau (1995) extends this model and illustrates that insiders of high quality firms voluntarily lock their shares for longer periods of time thereby strengthening the signal of high quality in an environment where information asymmetry is high. Consistent with this view, Brau, Lambson and McQueen (2005) find a positive relation between lockups and firm quality.…”

Section: Introductionmentioning

confidence: 57%

“…The SEO lockup decision has a positive effect on SEO announcement day returns, consistent with the prediction that, due to signaling or commitment device effects, secondary market investors value lockups positively. Courteau (1995) along with Brau, Lambson and McQueen (2005) argues that not only does the presence of a lockup agreement matter, but also the length of a lockup is relevant. A positive association between lockup length and announcement day returns would imply that secondary market investors' valuation of lockups increases with the number of days a lockup agreement is in place.…”

Section: Secondary Market Reactionmentioning

confidence: 99%