Market-to-book ratios, equity retention, and management ownership in Finnish initial public offerings

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Using a sample of Finnish initial public offerings, we find that the fraction of equity retained by the original shareholders is significantly positively related to the market-to-brook ratio. The result is consistent with the Leland and Pyle (1977) hypothesis suggesting that the original shareholders can signal the quality of their firm by their willingness to retain equity. Moreover, we find that management ownership's association with relative firm value is significantly positive at low ownership levels but insignificant at high ownership levels. This gives some support for the agency hypothesis which suggests that corporate value is a function of managerial equity ownership.