Selection Bias and the Underwriter Certification of the Largest Shareholders in Seasoned Equity Offerings (original) (raw)
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International Review of Financial Analysis, 2017
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The choice between rights and underwritten equity offerings: Evidence from Chinese stock markets
Journal of Multinational Financial Management, 2013
Because of their unique regulatory requirements, the Chinese stock markets provide a great opportunity to study the choice of flotation methods. Firms that are not qualified for the flotation method with a stricter ROE requirement suffer the most at announcement and experience significantly lower buy-and-hold abnormal returns than firms that are qualified. Our result suggests that the ROE requirement, although changes over time, plays an important role on the valuation of seasoned issues at announcement and the post-issue stock performance. More importantly, the freedom to the choice of flotation methods obtained by firms meeting the higher ROE requirement seems valuable.
The Changing Influence of Underwriter Prestige on Initial Public Offerings
Existing research finds that underwriter prestige is related to underpricing among initial public offerings. However, the relation is not stable through time. This study finds that the relation changed from negative to positive in 1993. When the sample is divided by level of underwriter prestige, underpricing by high-prestige underwriters exceeded underpricing by low-prestige underwriters for 18 of 20 years following 1993. The difference in underpricing between high-and low-prestige underwriters peaked in 1999 but continued after the market correction in 2000. High-prestige underwriters are responsible for the shift in underpricing that occurred in 1993.
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We develop and test a theory explaining the equilibrium matching of issuers and underwriters. We assume that issuers and underwriters associate by mutual choice, and that underwriter ability and issuer quality are complementary. Our model implies that matching is positive assortative, and that matches are based on firms' and underwriters' relative characteristics at the time of issuance. The model predicts that the market share of top underwriters and their average issue quality varies inversely with issuance volume. Various cross-sectional patterns in underwriting spreads are consistent with equilibrium matching. We find strong empirical confirmation of our theory.
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.
Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations
SSRN Electronic Journal, 2003
We investigate whether analyst behavior inf luenced banks' likelihood of winning underwriting mandates for a sample of 16,625 U.S. debt and equity offerings in 1993-2002. We control for the strength of the issuer's investment banking relationships with potential competitors for the mandate, prior lending relationships, and the endogeneity of analyst behavior and the bank's decision to provide analyst coverage. Although analyst behavior was inf luenced by economic incentives, we find no evidence that aggressive analyst behavior increased their bank's probability of winning an underwriting mandate. The main determinant of the lead-bank choice is the strength of prior underwriting and lending relationships.
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Asia-Pacific Journal of Financial Studies, 2009
This study empirically examines the role of underwriters' reputations on the IPO pricing process and its effect on subsequent initial returns. We analyzed 275 IPOs between July, 2002 and December, 2006. The reputation of each underwriters was analyzed based on the data reflecting their performances over the preceding three years. The analysis considered the following: number of offerings, the natural logarithm of average offering size, the relative offering size, the inverse of average underpricing ratio, and the ratio of refraining from undertaking a market stabilization activity or exercising a putback option. The logarithm of the underwriter's asset size and the composite index of the above six reputation variables are included in the variable we call "reputation." We find that underwriters with higher reputation exercise more bargaining power than either issuing firms or institutional investors in the offer price decision process. On the other hand, the underwriters' certification role is not sufficiently carried out to build a reputation on price discovery. We propose an incentive system that would encourage voluntary assessment of underwriters' competency, which can ultimately bolster their reputations in terms of their price discovery ability.
What order flow reveals about the role of the underwriter in IPO aftermarkets
International Journal of Managerial Finance, 2009
IPO underwriter-brokers 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. The underwriters' role expands with greater issue uncertainty and diminishes with venture capitalist involvement and greater retention. Issue uncertainty is measured in pages of idiosyncratic risk factors and in the delay between the announcement and completion of the issue. Our first 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 number of supplier and customer contracts reported in the prospectus. Secondly, the underwriter's role in price discovery declines when the IPO is first in a new technology or product space. These findings indicate that the verification process (not de novo information production) is the key function of the underwriter Keywords: Initial public offering, IPO, underwriter, venture capitalist Classification: G24, G32