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The deterioration in post-Initial Public Offering (IPO) performance is well documented in financial economics literature (Jain and Kini, 1994; Zingales, 1995; Mikkelson et al., 1997; Pagano et al., 1998; Stoughton and Zechner, 1998; and Chemmanur and Fulghieri, 1999). What makes the present study unique is the investigation of elements of corporate governance responsible for such deterioration in performance. In the corporate governance literature, there is a continued debate about the basic relationship between the insiders’1 shareholding/ownership levels and the performance of firms. While numerous studies empirically confirmed a positive relationship between changes in the levels of insiders’ ownership and the performance of firms as was proposed by Jensen and Meckling (1976), an equal number of studies evidenced a negative relationship between them, as was propounded by Fama and Jensen (1983). Hence, a consensus is lacking regarding the exact relationship between the changes in the insiders’ ownership and the performance of firms.
The present study follows earlier studies like Jain and Kini (1994), Mikkelson et al. (1997) and Kim et al. (2004). Jain and Kini (1994) pioneered the research initiatives in the above direction by investigating the relationship between the ownership level of insiders in the post-IPO period and the post-IPO performance of firms with the help of a sample of 682 US public firms. They found a positive relationship between the two. Subsequently, Mikkelson et al. (1997) and Kim et al. (2004) investigated the above relationship with their samples of firms derived from the US and Thailand, respectively. Mikkelson et al. (1997) argued against any significant relationship between the changes in the levels of insiders’ ownership of firms at the time of IPOs and their post-IPO performance. Kim et al. (2004) evidenced a curvilinear relationship between them. While they found a positive relationship for firms with very low and very high levels of insiders’ ownership, they discovered a negative relationship for firms with intermediate levels of insiders’ ownership. Apparently no consensus has emerged from the limited number of empirical studies done so far regarding the nature of relationship between the changes in the levels of insiders’ ownership of firms at the time of IPOs and their post-IPO performance.
The research question of the present study is: What is the relationship between the change in insider’s ownership from pre-IPO to post-IPO and post-IPO performance deterioration of firms? To address the above research question first, the pre-IPO performance of firms is compared with their post-IPO performance. Then, a panel regression model is analyzed to access the relationship between change in performance and change in insider’s ownership from pre-IPO to post-IPO. The remainder of the paper is organized as follows: it presents a review of the theoretical and empirical studies, followed by the description of the data and methodology used in the study. Subsequently, the results are presented, and finally, the conclusion is offered.
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