Abstract
We examine the causes and consequences of insiders' liquidity needs as a motivation for the secondary sales in an initial public offering (IPO). Four main findings resulted from our analysis: (1) lower levels of pre-IPO cash holdings lead to lower levels of executive compensation, (2) smaller cash-pay results in greater levels of insider sales, (3) equity-pay levels do not directly affect the insider sales but do influence the presence of an IPO lockup period, which in turn affects the levels of insider sales, and (4) higher levels of insider sales due to liquidity needs result in lower levels of underpricing and long-run returns. Taken together these results also suggest that liquidity induced secondary sales can be a source of agency problems.
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