Abstract

Do executives influence IPO underpricing when they stand to gain from the increased value of their IPO stock options? The present thesis examines this question for 422 U.S. software IPO firms from 1996 to 2000. The specificity of the software industry coupled with the bull market of the late 90s affects the cost-benefit tradeoff an executive faces with respect to the offer price of an IPO. I consider the possible interplay of traditional underpricing theories (signaling, asymmetric information, litigation and managerial influence) with high human capital intensity in a tight labor market. I correct for an exhaustive list of variables including: pre-IPO stock ownership, underwriter quality, VC backing, founder-manager. OLS regression results show no difference in underpricing between option-granting and non-option-granting firms; however, greater underpricing is significantly associated with higher total dollar value of stock options granted to top management and/or CEOs. After controlling for endogeneity, I find no evidence that there's relation between option grants and underpricing. However, the bubble years 1998-2000 have significant explanatory power, under all specifications, with regard to the greater IPO underpricing for software companies compared to the average level of all industries in the same period. [PUBLICATION ABSTRACT]