The Impact on IPO Assurance Fees of Commercial Bank Entry into the Equity Underwriting Market (original) (raw)

The impact of audit firm industry differentiation on IPO underpricing

Pacific Accounting Review, 2007

Purpose -The purpose of this paper is to investigate the relationship between auditor industry differentiation (specialization) and the underpricing of initial public offerings (IPOs). The intention is to determine whether IPO firms -particularly those in the small firm segment of the market where information asymmetry is likely to be greatest -can benefit from significantly better IPO pricing by engaging the services of differentiated auditors. Design/methodology/approach -The paper examines a broad sample of initial public offerings made between 1991 and 2000. It also conducts univariate and multivariate tests to assess the relationship between IPO underpricing and auditor industry specialization. Findings -The paper finds that IPOs audited by Big 6 firms experience significantly less underpricing than IPOs audited by non-Big 6 firms, particularly among small clients. It also finds an additional (and significantly larger) reduction in underpricing when the client engages an auditor that has established itself as the clear leader in its industry.

The Influence of Underwriter and Auditor Reputations on IPO Under-pricing

European Journal of Business and Management, 2013

Companies considering initiating public offerings (IPO) expect to raise funds and would like to maximize their initial return. The asymmetry of information between parties involved in initial public offerings often jeopardizes potential investors' involvement. Besides the financial factors, the reputations of the underwriters and auditors have a significant impact on the initial return of shares. This paper aims to investigate and measure the influence of underwriter and auditor reputation on under-pricing of share prices. The findings show that the higher the reputation, the lower is the initial return of shares, thus there is a higher level of undervaluation. The samples used are companies listed in the Indonesia Stock Exchange (IDX) during the period of 2004-2009. This study could contribute to academics', companies' and investors' knowledge about the impact of non-financial factors on share prices during initial public offerings.

Auditors, Underwriters, and Firm Owners’ Interaction in an IPO Environment: The Case of OECD Nations

Sustainability, 2021

This study explores the effects of interactions among key stakeholders, i.e., auditors, underwriters, and firm owners on IPOs’ first-day returns in selected OECD nations. It also examines the alteration effects of legal origin (Common law and Civil law) on the relationship between the interacted key stakeholders and IPOs’ first-day returns. A total of four thousand one hundred and sixty-four IPOs from twenty-eight OECD nations are included in this study. Since it is cross-sectional data, a two-stage least square regression is applied. The empirical outcomes indicate that, in general, the interacted reputable underwriters and auditors have a positive impact on IPOs’ first-day return. The relationship is modified between common law and civil law nations, whereby in civil law nations, no significance is demonstrated except for the interaction between the reputable auditors and underwriters. In the common law nation, interactions between reputable auditors and ownership retention have a...

Single versus multiple banking: lessons from initial public offerings

The European Journal of Finance, 2015

A vast research in banking addresses the question of the costs and benefits of multiple bank relationships versus a single bank relationship. Although no clear-cutting conclusion is reached, several contributions suggest that multiple bank relationships might lead to a suboptimal level of monitoring, compared to a single bank relationship, as a result of free riding and coordination problems. We take a novel approach to tackle this research question, by looking at the role, if any, played by the number of lending relationships in initial public offerings (IPOs). We look at the short-term performances of IPOs as measured by underpricing and find that firms that go public with multiple bank relationships exhibit more underpricing than those that go public with a single bank relationship. This finding is independent of the number of bank relationships and/or whether any of the lending banks also acts as underwriter in the offering. We interpret our results as suggesting that the market attributes a weaker certification role to multiple bank relationships because of their less effective monitoring of IPO firms.

Equity Underwriting Spreads at Commercial Bank Holding Companies and Investment Banks

Journal of Financial Services Research, 2005

This paper focuses on relative equity issue costs at commercial bank-affiliated and investment bank underwriters over the period 1995-99. We estimate models for the gross spreads associated with both IPOs and SEOs, but disaggregate the sample by type of underwriter. Our methods are driven by theoretical arguments that bank-related underwriters could have certain competitive advantages relative to investment banks in securities underwriting. We find some distinctive differences among the factors influencing gross spreads at the commercial bank-affiliated underwriters relative to investment banks, primarily in the set of variables we identify with the certification role of underwriters. The IPO gross spreads at Section 20 underwriters are less sensitive to scale economies, reputation, uncertainty, third-party monitoring, and pricing performance. The differences are consistent with theories that suggest that commercial bank organizations possess unique technologies for managing information and/or that Section 20 firms can exploit diversification benefits from BHC affiliation. This interpretation is strengthened by the lack of significant differences in SEO underwriter spreads. The relative advantage that Section 20s possess in monitoring capabilities or technologies for managing information problems appear to be irrelevant when information is readily and cheaply available. The observed results are also consistent with Hansen's (2000) argument that underwriters compete for business on several different dimensions.

The effects of corporate governance and audit and non-audit fees on IPO Value

The British Accounting Review, 2011

This paper examines the effects of non-executive board members, audit committee composition and financial expertise, and fees paid to audit firms on the value of 375 UK initial public offerings (IPOs). Empirical findings show that underpricing decreases in audit fees whereas it increases in non-audit fees. A higher proportion of non-executive directors on the firm's board and audit committees with a higher proportion of non-executive directors and financial accounting expertise of their members positively moderate the interrelationships between underpricing and both audit and non-audit fees paid by companies going through an IPO. Further investigations using the adjusted price-to-book value as a proxy for firm value at IPO confirm our main findings that internal governance mechanisms may complement services provided by the auditors in terms of generating higher valuations. Controlling for the simultaneous determination of audit and non-audit fees, our results remain consistent.

The Impact of Audit Firm Industry Specialization on Fees Charged to Firms Going Public

In this paper we present and test an applied theory of auditor industry specialization. We use our theory to investigate how audit firm industry market share affects fees in the market for IPO assurance services. Our theory suggests that as an audit firm's share of a client industry increases, (a) the audit firm's costs will decrease and (b) service and assurance quality in that industry will increase. Given lower costs and higher quality, the key fee determinant as market share increases is the bargaining power that exists between the audit firm and the client. We believe that an audit firm's industry market share is a reasonable proxy for the firm's ability to differentiate itself from competitors. We further believe that an audit firm's ability to differentiate its services drives its relative bargaining power. Specifically, if a given audit firm does not possess significantly greater industry market share than its competitors, economies of scale -based cost savings are more likely to be passed along to clients. However, if the audit firm dominates an industry it should earn higher fees as the incentives to pass along cost savings dissipate. Our results support these contentions.

The Effects of Board Independence and Auditors' Audit and Non-Audit Fees on IPO Value

This paper examines the effect of board independence and fees paid to audit firms on the value of 375 UK IPOs. It controls for the simultaneous determination of audit and nonaudit fees and shows that both fees positively affect IPO value. The effect of both fees is significantly higher in firms with more independent boards. Hence, internal governance mechanisms may complement services provided by auditors in terms of generating higher valuations. We also find evidence of the positive moderating effects of venture capitalists. Overall, our results suggest that audit and non-audit fees are likely to be driven by filing requirements rather than client-specific rents suggesting the auditors' independence when determining cost of their audit and non-audit services to IPO firms.

The Role of the Underwriter in the IPO Aftermarket

2005

IPO underwriters dominate aftermarket trading but often follow rather than lead in price discovery. This suggests that the underwriter shares a certification, external monitoring and signaling role with aftermarket brokers, venture capitalists and founder-owners retaining equity. In this paper we investigate the cross-sectional determinants of the role of the underwriter in aftermarket price discovery. Not surprisingly, the underwriters' role expands with greater issue uncertainty and diminishes with venture capitalist involvement and greater retention of founder-owner equity. Our novel result is that verifiable facts are not a substitute for, but a complement to, underwriter certification and advice. Specifically, the underwriter's contribution to price discovery increases with the magnitude and complexity of the supplier and customer contracts reported in the prospectus. It declines when the IPO is first in a technology or product space, suggesting that verification processes (not de novo information production) are the key function of the underwriter.