Signalling models of IPO underpricing argue that owners of high-quality firms signal firm quality by underpricing shares sold at the IPO and retaining a large equity stake because they benefit from IPO signalling by selling further shares in the aftermarket at a higher share price. This hypothesis is tested by examining whether the probabilities and volumes of subsequent share issues or insider sales are related to the proposed IPO signals. There is evidence that post-IPO share issuance is related to initial returns, but the same is not true for insider selling. Moreover, little evidence is found to support the view that the proportion of equity retained by initial owners is an IPO signal. Therefore, the signalling hypothesis is rejected.
Tonks, I., & Espenlaub, S. (1998). Post-IPO directors’ sales and reissuing activity: an empirical test of IPO signalling models. Journal of Business Finance and Accounting, 25(9-10), 1037-1079. https://doi.org/10.1111/1468-5957.00226