ipo pricing and executive compensation.pdfVIP

INTERNATIONAL JOURNAL OF BUSINESS, 12(3), 2007 ISSN: 1083−4346 IPO Pricing and Executive Compensation a b c Ehsan Nikbakht , Manuchehr Shahrokhi , Robert Martin, Jr. a Professor of Finance, Zarb School of Business, Hofstra University Hempstead, NY 11549 finezn@ b Craig Fellow Professor of Finance, California State University-Fresno mshahrok@ c CPA, Robert Martin and Associates, Long Island, NY robert.martin@ ABSTRACT This paper empirically investigates whether executive compensation has any impact on the IPO pricing. Corporate governance issues including the CEO’s compensation are critical to the firm at the time of the IPO as many firms establish a formal separation of ownership and control for the first time. Underwriters, financial analysts, and potential investors are involved in pricing of an IPO. Greater levels of ownership by the firm’s executives and insiders decrease the underwriters’ risk as the new IPO needs price support to be fully placed in the initial offering. Both of these outcomes may decrease underwriters’ profits. Initial public offerings present a unique opportunity to study the value that investors assign to executive compensation, because these companies do not have a history of stock prices or publicly available financial information. As such, IPOs block out many of the market forces and media attention that affect their valuations. Through logistic regressions and multiple regressions, we show that if a CEO retains equity ownership in his/her company subsequent to its IPO, this