Insiders (initial owners/managers) ownership after the IPO

What is it about?

This study examines the firm's equity ownership by insiders and institutional investors starting right after the firm goes public, its decline thereafter, and what alters the decline. The effect that re-entry into capital market via a seasoned equity offering (SEO) increases the incentive of management to hold higher stock ownership as a desire to raise additional capital via SEO because it implicitly raises management's stake. This study shows that it raises insider stockholding relative to what it otherwise would have been, thus providing an avenue by which this aspect of corporate governance is improved. These findings indicate that, in expectation, the increased holdings due to re-entry into the capital market almost exactly offsets 1 year's downward trend in management shareholdings. Also, we find an interesting interplay between types of institutional investors in that CEOs tend to hold less stock after the IPO if external blockholders initially hold more.

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Why is it important?

The agency theory indicates that as the firms went public, initial owners/managers incentives to maximize the value of the firm will decline. This study shows that when IPO firms plan to conduct SEO, the initial owners/managers incentive to maximize the value of the firm is restored and initial owners/managers tend to retain larger ownership when firms need to raise additional capital through SEO than otherwise.