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Local underwriter oligopolies and IPO underpricing

  • Liu, Xiaoding
  • Ritter, Jay R.

We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 102 (2011)
Issue (Month): 3 ()
Pages: 579-601

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Handle: RePEc:eee:jfinec:v:102:y:2011:i:3:p:579-601
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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