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The Information Advantage of Underwriters in IPOs

Author

Listed:
  • Yao-Min Chiang

    (National Taiwan University, Taipei, Taiwan 10617)

  • Michelle Lowry

    (Drexel University, Philadelphia, Pennsylvania 19104)

  • Yiming Qian

    (University of Iowa, Iowa City, Iowa 52241)

Abstract

Using a unique data set of dealer-level trading data in bookbuilding initial public offerings (IPOs), we find strong evidence that lead underwriter trades in IPO firms are significantly related to subsequent IPO abnormal returns. This relation is concentrated among issues in which underwriters’ information advantage is likely greater, specifically among IPOs with higher information asymmetry or subject to higher investor sentiment and among underwriters with the most industry experience. In contrast, we find no similar relation for trades by other syndicate members, who are not involved in due diligence or pricing, or around auction IPOs, which are characterized by less underwriter involvement. Our results are consistent with the joint hypothesis that underwriters of bookbuilding IPOs gain unique insight into the values of these client firms and that they trade on this information advantage.

Suggested Citation

  • Yao-Min Chiang & Michelle Lowry & Yiming Qian, 2019. "The Information Advantage of Underwriters in IPOs," Management Science, INFORMS, vol. 65(12), pages 5721-5740, December.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:12:p:5721-5740
    DOI: 10.1287/mnsc.2018.3126
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    References listed on IDEAS

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    4. Colak, Gonul & Gounopoulos, Dimitrios & Loukopoulos, Panagiotis & Loukopoulos, Georgios, 2021. "Political power, local policy uncertainty and IPO pricing," Journal of Corporate Finance, Elsevier, vol. 67(C).

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