Underpricing, Share Overhang, and Insider Selling in Follow‐on Offerings

Shaorong Zhang

The Financial Review, 2005, vol. 40, issue 3, 409-428

Abstract: Prospect and information‐momentum theories predict that insiders can offer fewer shares in an initial public offering (IPO) to create informational momentum and obtain higher prices in follow‐on offerings. I find that dilution and insider participation in the IPO are negatively related to the number and size of follow‐on offerings, consistent with the prediction. However, insider selling in follow‐on offerings is positively related to IPO selling, contrary to the theories. Returns around follow‐on offering announcements are more negative for newly public firms than older firms, but for newly public firms do not differ by whether the announcement comes before or after the lockup expiration date.

Date: 2005
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