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Does Underwriter Reputation Affect the Performance of IPO Issues?

Author

Listed:
  • Junbo Wang

    (Syracuse University)

  • Sheen Liu

    (Youngstown State)

  • Chunchi Wu

    (Syracuse University)

Abstract

In this paper we examine the relationship between performance of the Chinese IPO firms and the reputation of investment bankers underwriting their stocks. Similar to previous studies on well-developed stock markets, we find that the initial return on the first day of trading is strongly positive for Chinese IPO stocks due to underpricing. This initial return is negatively related to the underwriter's reputation, suggesting that the better the reputation of the underwriter, the less underpricing and hence, the lower the initial return of the IPO stock. Extending the analysis to a ten-day window after the first trading day, we find that the cumulative return becomes negative but that stocks with more prestigious underwriters experience less decline. We also examine the three year return of the IPOs. Contrary to previous findings, we find a positive long-run return for the Chinese IPO stocks. This long-run return is positively correlated with underwriter reputation. Finally, we find some evidence of positive long-run operating performance for the IPO firms that employ more prestigious underwriters.

Suggested Citation

  • Junbo Wang & Sheen Liu & Chunchi Wu, 2003. "Does Underwriter Reputation Affect the Performance of IPO Issues?," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 8(3), pages 17-41, Fall.
  • Handle: RePEc:pep:journl:v:8:y:2003:i:3:p:17-41
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    Keywords

    IPO ; Stock Market ; Stocks;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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