Managerial confidence and initial public offerings

- We examine the relation between managerial overconfidence and IPO outcomes.
- Managerial overconfidence is positively correlated with IPO underpricing.
- Overconfident managers appear to underprice to signal their beliefs to investors.
- SEO results suggest that overconfident managers fail to benefit from this signal.
- Overall, we find that highly overconfident managers are detrimental to firm value.

Information asymmetry may act as a catalyst for an association between managerial confidence and initial public offering (IPO) outcomes. This could occur if overconfident managers overinvest in producing information prior to going public, time offerings during periods when disagreement between managers and investors is low, or attempt to signal their beliefs to less informed market participants. Our evidence suggests that highly overconfident managers attempt to use underpricing to signal their beliefs to the market in an unsuccessful effort to receive greater value for their shares in follow-on offerings. This further suggests managerial overconfidence can be harmful to the firm.