The Certification Role of Pre-IPO Banking Relationships: IPO Underpricing and Post-IPO Performance in Japan

Yoshiaki Ogura

No 1423, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: We find empirical evidence that pre-IPO relationships with commercial banks through lending and investment via their venture capital subsidiaries significantly reduces IPO underpricing, whereas the affiliation between a lead underwriter and venture backing the IPO company does not. We also obtain evidence for lower post-IPO risk and return for firms with a pre-IPO banking relationship. These findings suggest that a pre-IPO banking relationship certifies the low risk of an IPO firm, whereas investors' concerns about conflicts of interest are not significant. Given the fact that institutional investors are a minority in the allocation of IPO stocks in Japan, the former effect is expected to come mainly from reducing either the investors' winner's curse or the signaling incentive of IPO firms, rather than from the reduction in the information rent for institutional investors participating in the book-building process.

Keywords: IPO underpricing; winner's curse; information revelation; conflict of interests; relationship banking (search for similar items in EconPapers)
JEL-codes: D82 G21 L14 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-03
New Economics Papers: this item is included in nep-ban and nep-cfn
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