The Pre-IPO Dividend Puzzle

We investigate dividend payments of companies prior to their IPOs. U.S. companies conducting an IPO between 1990 through 2006 comprise our sample. Pre-IPO dividend payments are significant both in number and size in the quarter leading up to the IPO. We find support for the hypothesis that pre-IPO shareholders use dividends as a means to secure liquidity around the IPO. In such a way they avoid the bad signal of selling shares at the IPO itself. Furthermore, insiders are actively managing their cash holdings prior the IPO. They fear the market undervalues the marginal dollar of excess cash in the IPO and reduce their cash holdings accordingly. We reject the hypothesis that insiders can take advantage of a window of opportunity by stripping off the company’s hard assets before going public.