Signalling models of IPO underpricing argue that owners of high-quality firms signal their high quality by underpricing shares sold at the IPO and retaining a large equity stake because they can recoup the utility costs of IPO signalling by selling further (primary) and retained (secondary) shares in the aftermarket at a higher share price. Based on a sample of 428 IPOs issued in the UK during 1986-91, this paper attempts to test these signalling models by examining the extent to which initial owners of IPO companies return to the market after the IPO either through further share issues or sales of shares retained at the IPO, and whether the probabilities and/or relative volumes of these subsequent share issues/sales are related to the proposed IPO signals. Although we find some evidence that post-IPO share issuance is related with initial IPO returns in a way consistent with signalling, the same is not true for post-IPO insider trading. Moreover, the second proposed signal, the proportion of equity retained by initial owners, is found to be unrelated with post-IPO share issuance or directors' selling. On balance therefore, the testable hypotheses derived from existing IPO-underpricing signalling models are rejected.
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