Asymmetric Information in the Market for IPOs

Heather Rhodes
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Heather Rhodes: Department of Economics & Finance, University of North Alabama, Florence, AL, USA

International Journal of Finance & Banking Studies, 2018, vol. 7, issue 3, 01-19

Abstract: This study utilizes hand-collected ownership data to re-examine the signaling, agency and wealth effect theories in a matched-sample of initial public offerings (IPOs) issued in the U.S. prior to and following the passage of the Sarbanes-Oxley Act of 2002 (SOX). SOX provides some motivation for revisiting these topics because evidenceexists that it may have affected the types of firms going public and ultimately the relatively importance of adverse selection and moral hazard, the asymmetric information problems with which these theories are concerned. Results on both the pre-and post-SOX samples are consistent with the signaling theory and evidence of a wealth effect exists in both eras. However, in contrast to results of studies conducted prior to SOX, both the pre-and post-SOX results give little credence to the agency theory, suggesting that SOX has not impacted investors’ concerns regarding moral hazard. Rather, the difference between the pre-SOX results and the results of previous studies suggests that SOX appeared to reduce moral hazard concerns only through its effect on the self-selection of firms going public.That is, SOX appears to have affected the types of firms going public and prohibited firms with greater moral hazard problems from accessing public equity markets.

Keywords: Initial Public Offerings; Asymmetric Information; Firm Valuation; Ownership Structure; Government Regulation (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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