The Cost of Going Public to Preexisting Shareholders

Abstract

IPO underpricing has been extensively studied; however, its impact on the wealth of preexisting shareholders has not been closely examined. Thus, we address the question of whether or not periods of high underpricing adversely affect preexisting shareholders. Unlike underpricing, we find that the percentage of shareholder wealth lost is surprisingly stable over time, which appears to be attributable, at least in part, to the share issuance (i.e., overhang) decisions of preexisting owners during such periods.