Do PIPOs Decrease IPO Uncertainty?

Abstract

This paper examines whether private IPOs (PIPOs) decrease information asymmetry in firms that eventually engage in an IPO. Theoretically, PIPOs can mitigate adverse selection and moral hazard problems because private investments can signal undervaluation and potentially provide more effective monitoring. Consequently, firms with larger, more recent, and frequent PIPOs should experience less underpricing and post-IPO volatility relative to other IPOs due to increased monitoring, lower signal attenuation, and positive feedback with existing investor buy-ins, respectively. Results indicate the percentage of PIPO investment compared to total equity at IPO is negatively associated with underpricing, thus suggesting PIPOs decrease information asymmetry. However, the longer the amount of time between the last PIPO and the IPO and the total number of PIPOs are positively related to underpricing.