Executive Stock Options and Ipo Underpricing
Executive Stock Options and IPO Underpricing
Michelle Lowry• Smeal College of Business Penn State University E-mail: mlowry@psu.edu Phone: (814) 865-1483
Kevin J. Murphy Marshall School of Business University of Southern California E-mail: kjmurphy@usc.edu Phone: (213) 740-6553
July 31, 2006 Abstract In about one-third of US IPOs between 1996 and 2000, executives received stock options with an exercise price set equal to the IPO offer price (rather than a price determined by the market). Among firms with such “IPO options”, 58 percent of top executives receive a net gain from underpricing, meaning the gain from IPO options exceeds the loss from the dilution of their pre-IPO shareholdings. If executives can influence the IPO offer price, we expect a positive relation between these IPO options and underpricing. Alternatively, executives may be able to influence the timing and terms of their stock options, and this would similarly predict a positive relation between IPO options and underpricing. However, we fail to find any evidence of such a relation. Our results run counter to the emerging literature claiming that managers blatantly take self-serving actions to improve their personal welfare at shareholder expense. ____________________________________________________________
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We would like to thank Laura Field, David Haushalter, Karin Lee, Ajai Singh, John Wald, and especially Jay Ritter for comments on this paper. We also thank Alexander Ljungqvist for providing data, and Laura Barrante, Eric Fricke, Douglas Gardner, and Lauren Roane for research assistance.
Corresponding author: Smeal College of Business, Penn State University, University Park, PA 16802. Fax: 814-865-3362.
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Executive Stock Options and IPO Underpricing
Abstract In about one-third of US IPOs between 1996 and 2000, executives received stock options with an exercise price set equal to the IPO offer price (rather than a price determined by the market). Among firms
Michelle Lowry• Smeal College of Business Penn State University E-mail: mlowry@psu.edu Phone: (814) 865-1483
Kevin J. Murphy Marshall School of Business University of Southern California E-mail: kjmurphy@usc.edu Phone: (213) 740-6553
July 31, 2006 Abstract In about one-third of US IPOs between 1996 and 2000, executives received stock options with an exercise price set equal to the IPO offer price (rather than a price determined by the market). Among firms with such “IPO options”, 58 percent of top executives receive a net gain from underpricing, meaning the gain from IPO options exceeds the loss from the dilution of their pre-IPO shareholdings. If executives can influence the IPO offer price, we expect a positive relation between these IPO options and underpricing. Alternatively, executives may be able to influence the timing and terms of their stock options, and this would similarly predict a positive relation between IPO options and underpricing. However, we fail to find any evidence of such a relation. Our results run counter to the emerging literature claiming that managers blatantly take self-serving actions to improve their personal welfare at shareholder expense. ____________________________________________________________
___________
We would like to thank Laura Field, David Haushalter, Karin Lee, Ajai Singh, John Wald, and especially Jay Ritter for comments on this paper. We also thank Alexander Ljungqvist for providing data, and Laura Barrante, Eric Fricke, Douglas Gardner, and Lauren Roane for research assistance.
Corresponding author: Smeal College of Business, Penn State University, University Park, PA 16802. Fax: 814-865-3362.
•
Executive Stock Options and IPO Underpricing
Abstract In about one-third of US IPOs between 1996 and 2000, executives received stock options with an exercise price set equal to the IPO offer price (rather than a price determined by the market). Among firms
References: Page 29 Hanley, K.W., 1993 Page 30 Yermack, D., 1997