Market conditions, underwriter reputation and first day return of IPOs

Ansley Chua

Journal of Financial Markets, 2014, vol. 19, issue C, 131-153

Abstract: In this study, I develop a model that describes underwriters' price-setting behavior during initial public offerings (IPOs). Because of reputational concerns during high valuation periods, top-tier underwriters adjust the initial offer price valuation to the lower, historical industry valuation. The top-tier underwriter effectively increases the first day return but decreases the long-run underperformance of the IPO. In contrast, low-tier underwriters price issues to maximize cash flow. The empirical findings support the model. The first day return is significantly correlated to the relative valuation, and reputational concerns are only important to top-tier underwriters.

Keywords: Investment banking; Underwriter reputation; Initial public offering; Industry valuation; Underpricing (search for similar items in EconPapers)
JEL-codes: E32 G24 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:19:y:2014:i:c:p:131-153

DOI: 10.1016/j.finmar.2013.11.001

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