Abstract

IPOs have long been considered as a potential way of exit for founders. Yet the existing literature has largely failed to examine founders' exit decisions and its influence on both the firm's information environment and the liquidity of its stock. In this paper, using a sample of new public firms, we examine founders' sales in the open market and relate them to the level of information asymmetry and various aspects of the liquidity of the firm's stock. We find that family ownership has a significant influence on the extent of founders' exit. In particular, founders with low (high) levels of ownership are more (less) likely to engage in sale transactions, indicating relatively faster (slower) exit. We also find that, in order to facilitate their exit, founders try to improve the market liquidity by engaging in additional information disclosure. This is reflected in the negative relation between the level of firm asymmetric information in the equity market and the extent of founders' sales. While the lower level of asymmetric information appears to translate into lower adverse selection risk, the founder trading patterns increase inventory risk for the market maker, leading to a wider bid-ask spread.