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

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  • 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/B6V7T-4YYGH0S-1/2/780a6d493f565efec54bf73d5285e373
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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. Yasushi Hamao & Frank Packer & Jay Ritter, 1998. "Institutional affiliation and the role of venture capital: evidence from initial public offerings in Japan," Research Paper 9807, Federal Reserve Bank of New York.
    2. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    3. Thomas J. Chemmanur & Shan He & Debarshi K. Nandy, 2010. "The Going-Public Decision and the Product Market," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1855-1908.
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    5. Jay Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," NBER Working Papers 8805, National Bureau of Economic Research, Inc.
    6. Kenji Kutsuna, 2004. "Why Does Book Building Drive Out Auction Methods of IPO Issuance? Evidence from Japan," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1129-1166.
    7. Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
    8. Baron, David P & Holmstrom, Bengt, 1980. " The Investment Banking Contract for New Issues under Asymmetric Information: Delegation and the Incentive Problem," Journal of Finance, American Finance Association, vol. 35(5), pages 1115-38, December.
    9. William Wilhelm & Alexander Ljungqvist, 2002. "IPO Pricing in the Dot-com Bubble," Economics Series Working Papers 2002-FE-07, University of Oxford, Department of Economics.
    10. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    11. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    12. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, vol. 2(4), pages 358-377, November.
    13. Kaneko, Takashi & Pettway, Richard H., 2003. "Auctions versus book building of Japanese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 439-462, September.
    14. Baron, D. P. & Holmström, B. R., 1980. "Abstract: The Investment Banking Contract for New Issues Under Asymmetric Information: Delegation and the Incentive Problem," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(04), pages 851-851, November.
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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. 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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