Pre-IPO Insider Ownership and Underpricing:
High-tech versus Low-tech IPOs

Kuntara Pukthuanthong-Le^* and Thomas Walker^**

^*San Diego State University

^**Concordia University

Abstract

Using data for 2,391 non-financial firm commitment initial public offerings (IPOs) between January 1996 and December 2002, we examine the relation between pre-IPO insider ownership and underpricing for high-tech and low-tech IPOs. Contrary to the conventional wisdom that suggests that firms in which insiders retain a higher proportion of insider ownership are generally less risky and thus less underpriced, we find that the relationship between insider ownership and underpricing differs between low- and high-tech firms. When high underpricing is expected, insiders of high-tech IPOs retain a high percentage of pre-IPO ownership. The opposite is observed for low-tech IPOs. To adjust for endogeneity biases, we use a simultaneous equations framework.

JEL Classification: G24; G32; G39

Keywords: Initial Public Offerings; Insider Ownership