Information disclosure and the initial public offering discount : Australian evidence.

Countries vary in their policies and regulations imposing selling restrictions on insiders' shares when a firm lists on a stock exchange. The US and UK adopt a free market approach, allowing insiders of an initial public offering (IPO) firm to select whether to voluntarily impose selling restrictions on their shares. Other countries (e.g., Germany, France, the Netherlands, Italy, and Singapore) mandate selling restrictions on insiders' shares for all IPOs on their exchanges. In Australia, the Australian Securities Exchange (ASX) imposes mandatory selling restrictions on insiders' shares (MSRs) for IPO firms that do not satisfy a profit test or an assets test. Using an Australian IPO setting where insiders' shares can be subject to MSRs, the study investigates whether there is a difference in the IPO discount (underpricing) between firms with and without MSRs. The study also examines whether the IPO discount (underpricing) for firms with MSRs is affected by (i) the extent to which insider equity ownership is subject to MSRs, (ii) the length of MSRs, and (iii) the strength of firm corporate governance. To investigate these issues, the study employs a sample of Australian IPO firms listing from 1 March 2003 to 31 December 2008. In the primary tests the IPO discount (underpricing) is measured using the difference in the first-day closing price and issue price. In robustness tests, the price at the end of 3 months is used. The study reports that 81 per cent of the 711 IPO firms included in this study, failed to satisfy the profit test or the assets test and therefore had MSRs. The study finds that the IPO discount (underpricing) of firms with MSRs is significantly lower than that of firms without MSRs. This finding is contrary to the prediction that the IPO discount (underpricing) is higher for MSRs firms due to their higher financial risk. The findings suggest that primary investors of IPO firms with MSRs enjoy lower returns on the first-day of trading compared to those of IPQ firms without MSRs. Consistent with the prediction, the study finds a significant positive association between insider equity ownership subject to MSRs and the IPO discount (underpricing). However, the length of MSRs is insignificantly associated with the IPO discount (underpricing) of firms with MSRs. Furthermore, the study predicts and finds that the strength of corporate governance is significantly negatively associated with the IPO discount (underpricing) of firms with MSRs. The study contributes to the literature in the following ways. The findings provide practical insights for investors, regulatory authorities, and insiders. They inform primary investors that they are more likely to obtain higher IPO discount (underpricing) on the first-day of trading if they subscribe for the shares of IPO firms without MSRs than for those of firms with MSRs. The findings suggest that the presence of MSRs in Australian IPOs do not benefit primary investors in terms of higher underpricing relative to IPO firms without MSRs. The study suggests that the regulatory requirement for MSRs benefits the insiders of IPO firms when raising equity by listing. The ASX is reviewing the threshold levels associated with the profit and assets tests that determine the imposition of selling restrictions. The findings from this study can inform these deliberations. The findings inform investors that greater insider equity ownership subject to MSRs is associated with higher IPO discount (underpricing), favouring primary investors. However, the AXS's policy of differing lengths of selling restrictions on insiders' shares has no impact on the IPO discount (underpricing). The implication is that the length of MSRs is not an important consideration for investors. The findings that firms with MSRs and stronger corporate governance have lower IPO discount (underpricing) than firms with MSRs and weaker corporate governance suggest that governance characteristics are determinants of the issue price. Insiders of IPO firms with MSRs and strong governance can set a higher IPO issue price resulting in a lower IPO discount (underpricing).