Local underwriter oligopolies and IPO underpricing

Xiaoding Liu and Jay Ritter

Journal of Financial Economics, 2011, vol. 102, issue 3, 579-601

Abstract: We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.

Keywords: IPOs; Underwriters; Oligopoly; Venture capital; Analysts (search for similar items in EconPapers)
JEL-codes: G24 L13 L22 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (109)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:102:y:2011:i:3:p:579-601

DOI: 10.1016/j.jfineco.2011.01.009

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