Publication

Abstract : In this article we examine whether insider share selling in an initial public offering (IPO) influences RD expenditures. Insiders (managers and venture capitalists) who sell their pre-offering shareholdings might try to increase the IPO offer price (1) by overinvesting in RD to signal the firm's prospects (the signaling hypothesis) or (2) by underinvesting in RD to increase current reported earnings (the earnings fixation hypothesis). We find that, for a sample of 243 IPOs from 1986 to 1990, change in RD spending in the year of the IPO is negatively related to managerial selling. Because reductions in RD spending increase current earnings at the expense of future earnings, our evidence suggests that managers believe that investors place more emphasis on current earnings and less emphasis on RD and therefore spend less on RD. We also document a positive association between discretionary current accruals in the offering year and managerial selling, suggesting that selling managers manipulate accruals as well.