Signaling and the Valuation of Unseasoned New Issues




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    • Assistant Professor, Schools of Business Administration, University of California, Berkeley, and Assistant Professor, Faculty of Commerce, The University of British Columbia. The authors gratefully acknowledge the financial support of a Dean Witter Foundation grant at the Institute of Business and Economic Research, University of California, Berkeley, and a U.B.C. Humanities and Social Sciences grant. Our colleagues at both schools, especially Hayne Leland, David Pyle, Jim Wilcox, and the members of the Finance Workshop at each school, have attempted to purge earlier versions of this paper of its most glaring errors. Special thanks for their insightful comments go to Jay Ritter of the University of Pennsylvania and the Editor of the Journal of Finance. All remaining errors are the shared property of the authors.


This paper is an empirical examination of the relation between firm value and two potential actions by entrepreneurs attempting to signal to investors information about otherwise unobservable firm features. The signals investigated are the proportion of equity ownership retained by entrepreneurs and the dividend policy of the firm; both signals are hypothesized to be positively related to firm value. Using a sample of unseasoned new equity issues, the empirical results are consistent with the entrepreneurial ownership retention hypothesis, but the dividend signaling hypothesis is rejected.