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Market conditions, underwriter reputation and first day return of IPOs

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  • Chua, Ansley

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.

Suggested Citation

  • Chua, Ansley, 2014. "Market conditions, underwriter reputation and first day return of IPOs," Journal of Financial Markets, Elsevier, vol. 19(C), pages 131-153.
    • Handle: RePEc:eee:finmar:v:19:y:2014:i:c:p:131-153
    DOI: 10.1016/j.finmar.2013.11.001
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    Cited by:

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    2. Chua, Ansley & Nasser, Tareque, 2016. "Insider sales in IPOs: Consequences of liquidity needs," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 1-17.
    3. Sheela Sundarasen & Kamilah Kamaludin & Izani Ibrahim & Usha Rajagopalan & Nevi Danila, 2021. "Auditors, Underwriters, and Firm Owners’ Interaction in an IPO Environment: The Case of OECD Nations," Sustainability, MDPI, vol. 13(11), pages 1-13, June.

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    More about this item

    Keywords

    Investment banking; Underwriter reputation; Initial public offering; Industry valuation; Underpricing;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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