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Investment Banks' Entry into New IPO Markets and IPO Underpricing

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  • Simon Yu Kit Fung

    (School of Accounting and Finance, Hong Kong Polytechnic University, Kowloon, Hong Kong)

  • Ferdinand A. Gul

    (Department of Accounting and Finance, School of Business, Monash University Malaysia, Kuala Lumpur, Malaysia)

  • Suresh Radhakrishnan

    (School of Management, University of Texas at Dallas, Richardson, Texas 75083)

Abstract

We examine the relationship between investment banks' initial public offering (IPO) market shares and their prior IPO underpricing in the new IPO market for China-based companies on the Hong Kong Stock Exchange. To gain expertise in Chinese business practices, investment banks have the incentive to obtain business in this new IPO market by providing high offer prices to the issuer, leading to less underpricing and less money on the table. We hypothesize and find that the less an investment bank underprices China-based company IPOs, the greater its subsequent market share of China-based company IPOs in the Hong Kong Stock Exchange. Furthermore, this relationship is driven by a bank's initial China-based company IPO deals. These results suggest that in new IPO markets, investment banks' initial market shares, obtained through lower underpricing, help them grow their market shares in later periods, possibly through the expertise gained in the initial business. This paper was accepted by Mary Barth, accounting .

Suggested Citation

  • Simon Yu Kit Fung & Ferdinand A. Gul & Suresh Radhakrishnan, 2014. "Investment Banks' Entry into New IPO Markets and IPO Underpricing," Management Science, INFORMS, vol. 60(5), pages 1297-1316, May.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:5:p:1297-1316
    DOI: 10.1287/mnsc.2013.1817
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    References listed on IDEAS

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    3. Klein, Peter G. & Wuebker, Robert & Zoeller, Kathrin, 2016. "Relationship banking and conflicts of interest: Evidence from German initial public offerings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 210-221.

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