The Overpricing Problem: Moral Hazard and Franchises

Heather Eckert, Henry van Egteren () and Troy Hannweber
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Henry van Egteren: University of Alberta, Department of Economics, Postal: 8-14 HM Tory Building, Edmonton, AB, T6G 2H4
Troy Hannweber: University of Alberta, Department of Economics, Postal: 8-14 HM Tory Building, Edmonton, AB, T6G 2H4

No 2012-2, Working Papers from University of Alberta, Department of Economics

Abstract: We hypothesize that moral hazard is an important factor in explaining the under performance of firms, identified by Ritter (1991), following initial public offerings (IPOs). We test this hypothesis by comparing post-IPO returns of franchised and non-franchised firms. Franchised IPOs, whose franchise agreements mitigate the moral hazard problems that arise from the dilution of ownership following an IPO, outperform their non-franchised, matched counterpart IPOs over five years in the aftermarket.

Keywords: IPO; moral hazard; overpricing; franchises (search for similar items in EconPapers)
JEL-codes: G02 G14 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2012-01-01
New Economics Papers: this item is included in nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2012_002

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