Under-Diversification and Retention Commitments in IPOs

This study is an extension of Leland and Pyle's (1977) signaling model. It introduces, in addition to the retained ownership, the length of the holding period to which the owner commits in the prospectus as a signal of firm value. The length of the holding period is found to be a signaling mechanism that complements ownership retention. Depending on the information structure of the firm, the entrepreneur may prefer to commit to a holding period longer than the minimum required by securities regulations.