Equity retention and initial public offerings: the influence of signalling and entrenchment effects

Within the context of initial public offerings (IPOs) the value of firms at the point of flotation appears to be positively and significantly related to the amount of equity retained by the original owners. But certain theoretical arguments and some limited empirical evidence suggest that the form of the relationship between firm value and retained equity may need further consideration. UK data is used for the first time to examine the relationship between equity retention and firm value at flotation. Empirical results indicate that the relationship is not significantly positive across the whole range of possible values. Firm value is found to be positively and significantly related to low and medium levels of equity retention, but not to high levels of retained equity. This adds to the evidence for other markets and casts further doubt over whether the retained equity variable is acting as a signal or has quite such a uniform effect as is commonly suggested in the literature.