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The Overpricing Problem: Moral Hazard and Franchises

Author

Listed:
  • Eckert, Heather

    (University of Alberta, Department of Economics)

  • van Egteren, Henry

    (University of Alberta, Department of Economics)

  • Hannweber, Troy

    (University of Alberta, Department of Economics)

Abstract

We hypothesize that moral hazard is an important factor in explaining the under performance of firms, identified by Ritter (1991), following initial public offerings (IPOs). We test this hypothesis by comparing post-IPO returns of franchised and non-franchised firms. Franchised IPOs, whose franchise agreements mitigate the moral hazard problems that arise from the dilution of ownership following an IPO, outperform their non-franchised, matched counterpart IPOs over five years in the aftermarket.

Suggested Citation

  • Eckert, Heather & van Egteren, Henry & Hannweber, Troy, 2012. "The Overpricing Problem: Moral Hazard and Franchises," Working Papers 2012-2, University of Alberta, Department of Economics.
    • Handle: RePEc:ris:albaec:2012_002
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    File URL: https://sites.ualberta.ca/~econwps/2012/wp2012-02.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    IPO; moral hazard; overpricing; franchises;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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