IPOs with reserved shares and their post-IPO performance

Abstract

Can the allocation of reserved shares to a firm’s employees be exploited as a possible signaling tool that separates high-quality firms from low-quality firms at their initial public offering (IPO)?

In this paper, we will explore the signaling effect of reserved shares by investigating the relationship between reserved shares and a firm’s post-IPO performance.

Specifically, we will analyse a firm’s post-IPO performance based on its stock returns and operating performance. Utilising cumulative market-adjusted abnormal returns (MAAR), this study provides preliminary evidence that firms with a greater proportion of reserved shares generally experience higher stock returns. However, employing return on assets (ROA), return on equity (ROE) and return on sales (ROS) as proxies of a firm’s operating performance, we find no significant relationship between reserved shares and a firm’s operating performance.