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The Overpricing Problem: Moral Hazard and Franchises

  • 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)

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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File URL: http://www.ualberta.ca/~econwps/2012/wp2012-02.pdf
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Paper provided by University of Alberta, Department of Economics in its series Working Papers with number 2012-2.

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Length: 23 pages
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:ris:albaec:2012_002
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  1. Ljungqvist, Alexander P. & Nanda, Vikram & Singh, Rajdeep, 2001. "Hot Markets, Investor Sentiment and IPO Pricing," CEPR Discussion Papers 3053, C.E.P.R. Discussion Papers.
  2. 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.
  3. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
  4. Eckbo, B Espen & Norli, √ėyvind, 2005. "Liquidity Risk, Leverage and Long-Run IPO Returns," CEPR Discussion Papers 4832, C.E.P.R. Discussion Papers.
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