IPO Pricing and Executive Compensation‪.‬

ABSTRACT This paper empirically investigates whether executive compensation has any impact on the IPO pricing. Corporate governance issues including the CEO's compensation are critical to the firm at the time of the IPO as many firms establish a formal separation of ownership and control for the first time. Underwriters, financial analysts, and potential investors are involved in pricing of an IPO. Greater levels of ownership by the firm's executives and insiders decrease the underwriters' risk as the new IPO needs price support to be fully placed in the initial offering. Both of these outcomes may decrease underwriters' profits. Initial public offerings present a unique opportunity to study the value that investors assign to executive compensation, because these companies do not have a history of stock prices or publicly available financial information. As such, IPOs block out many of the market forces and media attention that affect their valuations. Through logistic regressions and multiple regressions, we show that if a CEO retains equity ownership in his/her company subsequent to its IPO, this may signal that the IPO price is undervalued based on the anticipated future performance of the company. Thus, both the underwriters and the investors may react differently to the agency implications of equity ownership. The inclusion of other variables, beyond CEO ownership and CEO salary, made the logistic regression model unstable and the coefficients inappropriate. This could be detected from lower significance and lower partial correlations for the variables not in the equation (CEO Options and CEO Bonus). As such, we conclude that the market recognizes the positive signal of the CEO ownership and the CEO salary in IPO pricing in a three-month periods. A correct classification of 85% in the logistic regression also supports the relevance of the CEO ownership and CEO salary in IPO pricing.