What order flow reveals about the role of the underwriter in IPO aftermarkets (original) (raw)
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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.
When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket
The Journal of Finance, 2000
This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three month period after an IPO. We find that the lead underwriter is always the dominant market maker, he takes substantial inventory positions in the aftermarket trading, and co-managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.
Underwriter networks, investor attention, and initial public offerings
Journal of Financial Economics, 2016
Using various centrality measures from social network analysis, we analyze how the loca- tion of a lead initial public offering (IPO) underwriter in its network of investment banks affects various IPO characteristics. We hypothesize that investment banking networks allow lead IPO underwriters to induce institutions to pay attention to the firms they take pub- lic and to perform two information-related roles during the IPO process: an information dissemination role, in which the lead underwriter uses its investment banking network to disseminate noisy information about various aspects of the IPO firm to institutional investors; and an information extraction role, in which the lead underwriter uses its invest- ment banking network to extract information useful in pricing the IPO firm equity from institutional investors. Based on these two roles, we develop testable hypotheses relating lead IPO underwriter centrality to the IPO characteristics of firms they take public. We find that more central lead IPO underwriters are associated with larger absolute values of offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings and analyst coverage immediately post-IPO, greater stock liquidity post-IPO, and better long-run stock returns. Using a hand-collected data set of pre-IPO media coverage as a proxy for investor attention, we show that an important channel through which more central lead IPO underwriters achieve favorable IPO characteristics is by attracting greater investor attention to the IPOs underwritten by them.
Underwriter Networks in Initial Public Offerings
SSRN Electronic Journal, 2014
Using various measures from Social Network Analysis (SNA), we analyze, for the first time in the literature, how various IPO characteristics are affected by the location of the lead IPO underwriter in the network of investment banks generated by its participation in various IPO underwriting syndicates. We hypothesize that investment banking networks perform two possible information-related roles during the IPO process: an information extraction role, where its investment banking network helps the lead underwriter extract credible information useful in pricing the IPO from various institutional investors; or an information dissemination role, where the lead underwriter is able to use its investment banking network to credibly convey its favorable private information about the IPO firm to various institutional investors. Based on these two roles, we develop testable hypotheses relating the location of the IPO underwriter in investment banking networks to the following IPO characteristics: IPO price revision during book-building; IPO and secondary market valuations; IPO initial returns; participation by financial market players such as financial analysts and institutional investors; and long-run post-IPO stock returns. Consistent with our hypotheses, our empirical findings show that more central lead IPO underwriters are associated with larger price revisions; greater IPO and after-market valuations; larger IPO initial returns; greater institutional investor equity holdings and analyst coverage immediately post-IPO; and greater long-run stock returns. Most of these findings are robust to controlling for the endogenous matching between underwriter centrality and IPO firm quality, and are also robust to controlling for various measures of lead underwriter reputation. Overall, our findings are consistent with a strong information dissemination role for investment banking networks in IPOs.
2019
Motivated by a lack of availability of theoretical review of Initial Public Offerings (IPO) underpricing, this paper recognized a lack of presentation of theoretical explanations of the phenomenon of IPO underpricing in the literature. This makes scholars and investors interested in IPO underpricing research to face difficulty when it comes to the decision to employ IPO underpricing models. Hence, this paper provides a concise but comparatively adequate review of competing IPO underpricing theories. This review covered 13 theoretical models based on information asymmetry, institutional explanations, ownership and control reasons, and behavioral explanations to elucidate the phenomenon of IPO underpricing. Based on this review, the authors found that the underpricing phenomenon is eventually elucidated by the existence of information asymmetry amongst key IPO parties including the issuing firm, the underwriter, and the investor. Across the 13 reviewed IPO underpricing theories, the E...
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.
Underwriter learning about unfamiliar firms: Evidence from the history of biotech IPOS
Journal of Financial Markets, 2006
This article was originally published in a journal published by Elsevier, and the attached copy is provided by Elsevier for the author's benefit and for the benefit of the author's institution, for non-commercial research and educational use including without limitation use in instruction at your institution, sending it to specific colleagues that you know, and providing a copy to your institution's administrator.
Monitoring as a motivation for IPO underpricing
The Journal of Finance, 2004
Brennan and Franks (1997) and Stoughton and Zechner (1998) provide contrasting arguments for why monitoring considerations create incentives for managers to underprice their firms' IPOs (initial public offerings). Like Smart and Zutter (2003), we examine these arguments using a sample of U.S. IPOs. However, we find evidence that the determinants of initial returns, institutional shareholdings, and post-IPO likelihood of acquisition are not consistent with these arguments. Thus, we conclude that monitoring considerations are not important determinants of IPO underpricing. EVIDENCE THAT THE PRICES OF UNSEASONED NEW ISSUES of common stock (IPOs) in early secondary market trading are substantially higher, on average, than their offer prices has evoked an extensive literature trying to explain such underpricing. While prior literature has tended to focus on uncertainty/asymmetric information stories for such underpricing (e.g., Rock (1986) and Benveniste and Spindt (1989)), recent literature has suggested that post-IPO ownership considerations are also important. More specifically, this literature has suggested that monitoring considerations create incentives for managers to underprice their firm's stock in its first public offering. Brennan and Franks (1997), for example, argue that insiders have an incentive to underprice the IPO of their firm's stock in order to ensure its wide distribution, thereby reducing the likelihood of being monitored or removed by new shareholders, particularly institutional shareholders. Brennan and Franks call their hypothesis the reduced monitoring hypothesis. Consistent with their hypothesis, for a sample of 69 U.K. IPOs during 1986 to 1989, they find that: (1) Smaller applicants are allocated a larger share of oversubscribed/underpriced issues, and (2) the size and amount of subsequent outside large shareholdings are inversely related to the firm's degree of IPO underpricing. 1
Aftermarket support and underpricing of initial public offerings
Journal of Financial Economics, 1994
We study the aftermarket for 72 initial public offerings (IPOs) using comprehensive trade and quote-change data from every market maker for the first three days of trading. Underwriters quote higher bid prices than other market makers for issues that commence trading at or below the offer price. Underwriters repurchase large quantities of stock in the aftermarket without risk by overselling the issue by the amount of the overallotment option. If the IPO is hot, the overallotment option is exercised. If not, the short position is covered with aftermarket selling. We discuss several reasons for underwriter support. . Clifford Smith (the editor) refer-ee) provided suggestions that greatly improved the focus and clarity of the paper. Jeffrey Harris has provided excellent research assistance. Support of the ice Center at io State University (Schultz) and the University of Iowa (Zaman) is gratefully acknowledged.