Insider trading, pricing and the long-run performance of IPOs: evidence from the French market during the high-tech bubble

Abstract

This article empirically examines the relationship between insider (entrepreneurs and venture capitalists) trading and underpricing and long-run performance in a sample of 120 initial public offerings (IPOs) that took place on the Nouveau Marché in France during the high-tech bubble. We hypothesize that insiders were better informed than the market about the future prospect of the firms, particularly during the high-tech bubble characterized by strong information asymmetry. Trading activity was measured at the IPO date and over a three-year period after this date. We find no evidence suggesting that entrepreneurs and venture capitalists knowingly issue overvalued equity at the IPO date. However, there is weak, but statistically significant, evidence that suggests that entrepreneurs and venture capitalists acquire private information during the first years of flotation and have the ability to take advantage of it by selling overvalued equity. Both these types of insider seem to be the best informed on the future value of the firm. However, changes in ownership of banks and other shareholders are not followed by significant change in the firm's long term value.