Marketing When Insiders are Locked in: An Abstract

Abstract

Initial public offering (IPO) share overhang refers to the share retention in an IPO by pre-IPO shareholders, who are predominantly insiders. We evaluate the link between overhang and the strategic value of post-IPO marketing activity. IPO overhang is positively related to post-IPO marketing spendings. On average, a one-standard deviation increase in overhang leads to an additional $4.6 million spent on marketing during the three years after an IPO. Furthermore, in these three years, high overhang firms that spend more on marketing significantly outperform their counterparts. Finally, while greater marketing spendings are associated with enhanced equity liquidity, insiders do not derive an economically significant benefit. Overall, our results suggest that the positive link between overhang and marketing is more a reflection of insiders’ interest alignment than a self-serving desire to boost short-term stock performance or stock liquidity prior to cashing out. This positive effect is moderated by the existence of financial stakeholders such as venture capitalists, and non-financial stakeholders such as key customers. Despite the capital infusion and the rapid growth they realize from an IPO, newly public firms should not consider aggressive marketing a universal choice, as it is value-enhancing only when pre-IPO shareholders’ interests are aligned. Our findings advance the literature on marketing resource allocation, insider ownership and IPOs, and highlight their relations within an agency theory framework. The paper intends to contribute to the knowledge of researchers, managers, and investors. To date, the marketing literature has focused on agency issues and interest alignment mechanisms (e.g., compensation) of lower-level agents such as salespeople. However, mechanisms to align the interests of higher-level agents such as corporate decision makers have not received commensurate attention. Accordingly, we apply agency theory to corporate marketing decisions, by investigating the impact of share retention by pre-IPO shareholders, a potential interest alignment mechanism, on a firm’s post-IPO marketing strategy.