The Overpricing Problem: Moral Hazard and Franchises
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.
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- Alexander Ljungqvist & Vikram Nanda & Rajdeep Singh, 2006.
"Hot Markets, Investor Sentiment, and IPO Pricing,"
The Journal of Business,
University of Chicago Press, vol. 79(4), pages 1667-1702, July.
- Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
- Eckbo, B Espen & Norli, Øyvind, 2005.
"Liquidity Risk, Leverage and Long-Run IPO Returns,"
CEPR Discussion Papers
4832, C.E.P.R. Discussion Papers.
- Lee, Philip J. & Taylor, Stephen L. & Walter, Terry S., 1996. "Australian IPO pricing in the short and long run," Journal of Banking & Finance, Elsevier, vol. 20(7), pages 1189-1210, August.
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