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Underwriter networks, investor attention, and initial public offerings

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  • Bajo, Emanuele
  • Chemmanur, Thomas J.
  • Simonyan, Karen
  • Tehranian, Hassan

Abstract

Using various centrality measures from social network analysis, we analyze how the location of a lead initial public offering (IPO) underwriter in its network of investment banks affects various IPO characteristics. We hypothesize that investment banking networks allow lead IPO underwriters to induce institutions to pay attention to the firms they take public and to perform two information-related roles during the IPO process: an information dissemination role, in which the lead underwriter uses its investment banking network to disseminate noisy information about various aspects of the IPO firm to institutional investors; and an information extraction role, in which the lead underwriter uses its investment banking network to extract information useful in pricing the IPO firm equity from institutional investors. Based on these two roles, we develop testable hypotheses relating lead IPO underwriter centrality to the IPO characteristics of firms they take public. We find that more central lead IPO underwriters are associated with larger absolute values of offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings and analyst coverage immediately post-IPO, greater stock liquidity post-IPO, and better long-run stock returns. Using a hand-collected data set of pre-IPO media coverage as a proxy for investor attention, we show that an important channel through which more central lead IPO underwriters achieve favorable IPO characteristics is by attracting greater investor attention to the IPOs underwritten by them.

Suggested Citation

  • Bajo, Emanuele & Chemmanur, Thomas J. & Simonyan, Karen & Tehranian, Hassan, 2016. "Underwriter networks, investor attention, and initial public offerings," Journal of Financial Economics, Elsevier, vol. 122(2), pages 376-408.
  • Handle: RePEc:eee:jfinec:v:122:y:2016:i:2:p:376-408
    DOI: 10.1016/j.jfineco.2015.12.001
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    More about this item

    Keywords

    Underwriter networks; Investor attention; Initial public offerings; Underwriter centrality;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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