Do Underwriters Utilize Soft Information in their Businesses?

Yue Cai and Kazuo Yamada ()
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Yue Cai: University of Niigata Prefecture
Kazuo Yamada: GSM, Kyoto University

No 2505, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This study re-examines the role of underwriters as a soft information acquisition process. Our paper utilizes the data from Japan for two reasons. First, using the data from Japan allows us to use a unique merger event between a commercial bank and a securities company in Japan. The event enabled the underwriter to access the private information that the commercial bank holds. Secondly, distinct features characterize the Japanese IPO process: (1) regulations explicitly prohibit setting the offering price outside of the filing range; and (2) although bookbuilding in Japan is intended to engage institutional investors, the majority of IPO shares are allocated to retail investors, which diminishes the incentive for these institutions to provide private information. Our main analysis reveals a narrowing of the IPO price filing range and an increase in the likelihood that the offer price is set inside the range. Additional analysis shows that such an effect is particularly pronounced among firms exhibiting higher levels of information asymmetry. The paper concludes that private information enables the underwriter to determine the pricing of issuance securities.

Keywords: Information production; Underwriters; IPOs; Commercial banks (search for similar items in EconPapers)
JEL-codes: G12 G30 G41 N25 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2025-04
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