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Venture capital affiliation with underwriters and the underpricing of initial public offerings in Japan

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Listed author(s):
  • Arikawa, Yasuhiro
  • Imad'eddine, Gael
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    Abstract

    This paper presents evidence using Japanese data that shows that the principal-agent problem between underwriter and issuing firms is the cause of the underpricing of initial public offerings. We find that the initial return is lower when the venture capital is a subsidiary of the lead underwriter and directly invested into the issuing firm rather than via a limited partnership fund. We also find that the initial return is larger when one of the top three security firms is the underwriter. This means that underpricing is more serious when the bargaining power of the underwriter is large. Together, these findings support the hypothesis that an equity investment in issuing firms by the underwriter improves the alignment between the underwriter and the issuing firm, and thus helps to increase the offer price. The principal-agent problem between the underwriter and issuers is one of the reasons for the underpricing.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148-6195(10)00033-0
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    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 62 (2010)
    Issue (Month): 6 (November)
    Pages: 502-516

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    Handle: RePEc:eee:jebusi:v:62:y::i:6:p:502-516
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

    Keywords: Principal-agent problem IPO in Japan Underpricing;

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    1. Alexander Ljungqvist & William J. Wilhelm, 2003. "IPO Pricing in the Dot-com Bubble," Journal of Finance, American Finance Association, vol. 58(2), pages 723-752, 04.
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    Cited by:

    1. Pennacchio, Luca, 2013. "The causal effect of venture capital backing on the underpricing of Italian IPOs," MPRA Paper 48695, University Library of Munich, Germany.
    2. Otchere, Isaac & Vong, Anna P.I., 2016. "Venture capitalist participation and the performance of Chinese IPOs," Emerging Markets Review, Elsevier, vol. 29(C), pages 226-245.
    3. Sun, Yue & Uchida, Konari & Matsumoto, Mamoru, 2013. "The dark side of independent venture capitalists: Evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 279-300.

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