IPO performance under low information asymmetry and low agency conflicts: The case of demutualized insurers

The post-issue underperformance of initial public offerings has been widely documented. The hypothesis put forth in the literature is that firms take advantage of windows of opportunity by timing the offerings when shares are overvalued. This study investigates the hypothesis by examining the long-run performance of insurance firms that went public after going through a process called demutualization, an organization conversion from mutual to stock company. Because the demutualization process is highly regulated, managers of these insurance firms have lower ability to time the issue. Furthermore, the demutualization process is quite lengthy and transparent so these IPOs should exhibit lower information asymmetry and potentially lower agency conflicts (as the market provides more discipline than do policyholder/owners) than other IPOs. Empirical results show that demutualized insurance firms did not underperform various benchmarks with converting life insurers showing the best market performance. Further, it is documented that demutualized insurance firms ’ operating performance are also strong post-IPO. The results yield indirect support to the notion that managers of other types of IPO firms tak