How important are relationships for ipo underwriters and institutional investors
Download
1 / 18

How Important are Relationships for IPO Underwriters and Institutional Investors - PowerPoint PPT Presentation


  • 302 Views
  • Uploaded on

How Important are Relationships for IPO Underwriters and Institutional Investors? Murat Binay, Christo Pirinsky, and Qinghai Wang The Issues Participation in the IPO market is restricted IPOs are significantly underpriced (Table1) 20.1% over 1980-2000 4.7% in 1984 77.3% in 1999

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'How Important are Relationships for IPO Underwriters and Institutional Investors' - jaden


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
How important are relationships for ipo underwriters and institutional investors l.jpg

How Important are Relationships for IPO Underwriters and Institutional Investors?

Murat Binay, Christo Pirinsky, and Qinghai Wang


The issues l.jpg
The Issues Institutional Investors?

  • Participation in the IPO market is restricted

  • IPOs are significantly underpriced (Table1)

    • 20.1% over 1980-2000

    • 4.7% in 1984

    • 77.3% in 1999

  • The amount of money (Loughran and Ritter, 2002)

    • $9.1mil. (average IPO)

    • $27bil. (during 1990-1998)

  • Regular investors benefit


  • The agency view l.jpg
    The Agency View Institutional Investors?

    • Anecdotal evidence that underwriters build clienteles of regular investors  use IPOs as side-payments for commission revenues

      • Financial press

      • SEC investigations

      • Regulatory settlements

  • Statistical evidence  Reuter (2006)

  • Favoritism is at the expense of highly underpriced firms

  • Why would firms participate?

    • Changing objectives (Loughran and Ritter, 2002)

    • Limited information


  • The book building view l.jpg
    The Book-building View Institutional Investors?

    • The Book-building process

      • Involves a group of sophisticated investors

      • Investors submit (P,Q) combinations

      • Investment banks set up price and allocations

  • Underpricing

    • Rewards investors for their information

    • Cost for the issuing firm

  • Book-building has become increasingly popular around the world


  • The book building view5 l.jpg
    The Book-building View Institutional Investors?

    • Regular investors improve the efficiency of the IPO process (Benveniste and Spindt, 1989; Benveniste and Wilhelm, 1990)

      • Repeated-game set up: leverage

      • Lower underpricing

      • Liquidity

  • Endogenous information acquisition (Sherman, 2000; Sherman and Titman, 2002)

  • Book-building is not the only possible world for initial placement of equity…


  • Research objective l.jpg
    Research Objective Institutional Investors?

    • Do underwriters build clienteles of regular investors?

    • What are the implications?

    • Limited empirical evidence

      • Reuter (2006) √

      • Hanley (1993), Cornelli and Goldreich (2001), Hanley and Wilhelm (1995)

  • Major results

    • Yes! Underwriters build networks of regular investors

    • Improve efficiency

    • We do not exclude the possibility for agency-based allocations


  • Roadmap l.jpg
    Roadmap Institutional Investors?

    • Data

    • Relationship participation measure

    • Properties of the measure

    • Determinants of Relationship participation

    • Implications


    Slide8 l.jpg
    Data Institutional Investors?

    • IPOs of U.S. common stocks over 1980-2000

      • SDC New Issue Database

      • Filters

  • Institutional holdings

    • CDA Spectrum Database

    • Quarterly frequency

  • Is the end of the issuing quarter a good proxy for institutional participation?

    • Hanley and Wilhelm (1995): 38 IPOs – correlation is 0.91

    • Aggarwal (2003): short-term flipping is small – 15%

    • Large sample


  • Sample characteristics l.jpg
    Sample Characteristics Institutional Investors?


    Io characteristics l.jpg
    IO Characteristics Institutional Investors?


    Relationship participation measure l.jpg
    Relationship Participation Measure Institutional Investors?

    • Lead underwriter

    • Control for unconditional participation

    • Only active institutions are included

    • Only recent history: last 10 deals within past 5 years


    Relationship participation l.jpg
    Relationship Participation Institutional Investors?

    • RP and underpricing

    • RP for subperiods


    Relationship participation13 l.jpg
    Relationship Participation Institutional Investors?

    • RP and underwriter reputation

    • RP for subperiods


    Relationship participation14 l.jpg
    Relationship Participation Institutional Investors?

    • RP for Internet and Technology IPOs


    Relationship participation15 l.jpg
    Relationship Participation Institutional Investors?

    • RP for Several Underwriters


    Relationship participation16 l.jpg
    Relationship Participation Institutional Investors?


    Relationship participation17 l.jpg
    Relationship Participation Institutional Investors?

    • Do more connected underwriters offer lower underpricing, on average?


    Conclusion l.jpg
    Conclusion Institutional Investors?

    • Underwriters build strong clienteles of regular investors when allocating IPOs

    • Regular investors benefit more than casual investors by participating more in underpriced issues

    • Participation rates of regular investors

      • More information production

      • Less liquid IPOs

      • In IPOs that are more difficult to value

      • This efficiency – weaker in the late 90s


    ad