Hostname: page-component-76fb5796d-qxdb6 Total loading time: 0 Render date: 2024-04-26T06:46:10.127Z Has data issue: false hasContentIssue false
  • English
  • Français

The Role of Underwriter-Investor Relationships in the IPO Process

Published online by Cambridge University Press:  06 April 2009

Murat M. Binay ,
Vladimir A. Gatchev  and
Christo A. Pirinsky
Murat M. Binay
Affiliation:
murat.binay@cgu.edu, Graduate School of Management, Claremont Graduate University, 1021 North Dartmouth Avenue, Claremont, CA 91711
Vladimir A. Gatchev
Affiliation:
vgatchev@bus.ucf.edu, College of Business Administration, University of Central Florida, Orlando, FL 32816
Christo A. Pirinsky
Affiliation:
cpirinsky@fullerton.edu, College of Business and Economics, California State University, Fullerton, 2600 E. Nutwood, Suite 1060, Fullerton, CA 92831.
Get access Rights & Permissions [Opens in a new window]

Abstract

We find that in allocating initial public offerings (IPOs), underwriters favor institutions they have previously worked with. Regular investors benefit more than casual investors in IPOs through greater participation in underpriced issues. Relationship participation is more important in the distribution of IPOs with stronger demand, IPOs of less liquid firms, and deals by less reputable underwriters. Overall, our results are consistent with book-building theories of IPOs. Interestingly, for 1999–2000 we find that regular investors receive even more underpriced IPOs relative to previous years while we do not find evidence that they provide additional services in IPOs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 3 , September 2007 , pp. 785 - 809
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R. “Allocation of Initial Public Offerings and Flipping Activity.” Journal of Financial Economics, 68 (2003), 111–135.Google Scholar
Aggarwal, R.; Prabhala, N.; and Puri, M.. “Institutional Allocation in Initial Public Offerings: Empirical Evidence.” Journal of Finance, 57 (2002), 1421–1442.CrossRefGoogle Scholar
Barry, C. B. “Initial Public Offerings Underpricing: The Issuer's View—A Comment.” Journal of Finance, 44 (1989), 1099–1103.Google Scholar
Benveniste, L. M., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics, 24 (1989), 343–362.Google Scholar
Benveniste, L. M., and Wilhelm, W. J.. “A Comparative Analysis of IPO Proceeds under Alternative Regulatory Environments.” Journal of Financial Economics, 28 (1990), 173–208.Google Scholar
Carter, R. B.; Dark, F. H.; and Singh, A. K.. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285–296.CrossRefGoogle Scholar
Carter, R. B., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 1045–1067.Google Scholar
Chen, H., and Ritter, J. R.. “The Seven Percent Solution.” Journal of Finance, 55 (2000), 1105–1131.Google Scholar
Cornelli, F., and Goldreich, D.. “Bookbuilding and Strategic Allocation.” Journal of Finance, 56 (2001), 2337–2369.CrossRefGoogle Scholar
Cornelli, F., and Goldreich, D.. “Bookbuilding: How Informative Is the Order Book?” Journal of Finance, 58 (2003), 1415–1443.Google Scholar
S., Corwin, and Schultz, P.. “The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition.” Journal of Finance, 60 (2005), 443–486Google Scholar
Fernando, C. S.; Gatchev, V. A.; and Spindt, P. A.. “Wanna Dance? How Firms and Underwriters Choose Each Other.” Journal of Finance, 60 (2005), 2437–2369.Google Scholar
Fernando, C. S.; Krishnamurthy, S.; and Spindt, P. A.. “Are Share Price Levels Informative? Evidence from the Ownership, Pricing, Turnover, and Performance of IPO Firms.” Journal of Financial Markets, 7 (2004), 377–403.Google Scholar
Gompers, P., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.Google Scholar
Habib, M., and Ljungqvist, A.. “Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence.” Review of Financial Studies, 14 (2001), 433–458.Google Scholar
Hanley, K. W. “Underpricing of Initial Public Offerings and the Partial Adjustment Phenomenon.” Journal of Financial Economics, 34 (1993), 231–250.Google Scholar
Hanley, K. W., and Wilhelm, W. J.. “Evidence on the Strategic Allocation of Initial Public Offerings.” Journal of Financial Economics, 34 (1995), 231–250.Google Scholar
Houston, J.; James, C.; and Karceski, J.. “What Difference a Month Makes: Stock Analyst Valuations Following Initial Public Offerings.” Journal of Financial and Quantitative Analysis, 41 (2006), 111–137.Google Scholar
Ibbotson, R. G.; Ritter, J. R.; and Sindelar, J. L.. “The Market's Problems with the Pricing of Initial Public Offerings.” Journal of Applied Corporate Finance, 7 (1994), 66–74.Google Scholar
Jenkinson, T., and Jones, H.. “Bids and Allocations in European IPO Bookbuilding.” Journal of Finance, 59 (2004), 2309–2338.CrossRefGoogle Scholar
Lee, P. J.; Taylor, S. L.; and Walter, T. S.. “IPO Underpricing Explanations: Implications from Investor Application and Allocation Schedules.” Journal of Financial and Quantitative Analysis, 34 (1999), 425–444.Google Scholar
Loughran, T., and Ritter, J. R.. “Why Don't Issuers Get Upset about Leaving Money on the Table in IPOs?” Review of Financial Studies, 15 (2002), 413–443.Google Scholar
Loughran, T., and Ritter, J. R.. “Why Has IPO Underpricing Changed over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Lowry, M., and Schwert, G. W.. “IPO Market Cycles: Bubbles or Sequential Learning?” Journal of Finance, 57 (2002), 1171–1828.Google Scholar
Megginson, W., and Weiss, K. A.. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance, 46 (1991), 879–903.Google Scholar
Reuter, J. “Are IPO Allocations for Sale? Evidence from the Mutual Fund Industry.” Journal of Finance, 61 (2006), 2289–2324.CrossRefGoogle Scholar
Ritter, J. R., and Welch, I.. “A Review of IPO Activity, Pricing, and Allocations.” Journal of Finance, 57 (2002), 1795–1828.Google Scholar
Sherman, A. E. “IPOs and Long-Term Relationships: An Advantage of Book Building.” Review of Financial Studies, 13 (2000), 697–714.Google Scholar
Sherman, A. E. “Global Trends in IPO Methods: Book Building versus Auctions with Endogenous Entry.” Journal of Financial Economics, 78 (2005), 615–649.Google Scholar
Sherman, A. E., and Titman, S.. “Building the IPO Order Book: Underpricing and Participation Limits with Costly Information.” Journal of Financial Economics, 65 (2002), 3–29.CrossRefGoogle Scholar
Spatt, C., and Srivastava, S.. “Preplay Communication, Participation Restrictions, and Efficiency in Initial Public Offerings.” Review of Financial Studies, 4 (1991), 709–726.Google Scholar