THE IPO AND FIRST SEASONED EQUITY SALE - ISSUE PROCEEDS, OWNER MANAGERS WEALTH, AND THE UNDERPRICING SIGNAL/

Recent models of IPO underpricing suggest that high-quality firms unde rprice their IPOs to differentiate themselves from low-quality firms a nd, thus, receive a more favorable market response to subsequent equit y offerings. We test this suggestion for 172 industrial firms that mad e an initial public offering during 1987-1991 and made a subsequent se asoned equity offering within three years of their IPO. We examine two measures of the impact of the hypothesized underpricing signal net of the cost of employing that signal. Inconsistent with the underpricing signal hypothesis, we find no evidence that firms recover the cost of an underpriced IPO in either higher issue proceeds or in greater weal th for the firm's initial owners.