Leverage, Pre-IPO Insider Ownership, and Underpricing : High-Tech versus Low-Tech IPOs

The extant literature on initial public offerings (IPOs) generally assumes that a high degree of pre-IPO leverage serves as a positive signal of firm quality as it forces a firm's managers to adhere to tough budget constraints. Our paper questions the validity of this assumption when it is indiscriminately applied to all firms, while other potentially important determinants of a firm's optimal capital structure are ignored. We focus specifically on high-tech versus low-tech firms and find that debt only serves as a signal of better firm quality for low-tech IPOs, as reflected in smaller price revisions and lower underpricing. For high-tech IPOs, the effect of leverage is reversed: for these firms, higher leverage is associated with increased risk and uncertainty as reflected by higher price revisions and greater underpricing. Our results remain significant after controlling for various firm and offer characteristics, market and industry returns, and potential endogeneity between investment bank rankings, price revisions, and underpricing