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Do Underwriters Collaborate with Venture Capitalists in Ipos? Implications and Evidence


Gerard Hoberg


University of Maryland - Department of Finance

H. Nejat Seyhun


University of Michigan, Stephen M. Ross School of Business

April 6, 2009

AFA 2006 Boston Meetings Paper

Abstract:     
We test for potential collaboration between underwriters, venture capitalists, and other major owner managers in initial public offerings (IPOs). We find that VCs who are more loyal and tolerate higher underpricing receive long-term marketing support and favorable analyst revisions, allowing them to exit at high prices. Cooperating underwriters receive repeat business and more profits from allocating underpriced shares. The end of this extended support coincides with heavy insider selling and significantly negative abnormal returns. VCs enforce cooperation by switching lead underwriters when favors are not returned. Our collaboration hypothesis resolves some previously surprising findings regarding underpricing, long-term underperformance, insider trading patterns, and analyst research.

Number of Pages in PDF File: 52

Keywords: IPOs, initial public offerings, intial returns, collaboration, venture capital, underwriter, strategic alliances, quid pro quos

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Date posted: March 24, 2005 ; Last revised: April 7, 2009

Suggested Citation

Hoberg, Gerard and Seyhun, H. Nejat, Do Underwriters Collaborate with Venture Capitalists in Ipos? Implications and Evidence (April 6, 2009). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=690421 or http://dx.doi.org/10.2139/ssrn.690421

Contact Information

Gerard Hoberg (Contact Author)
University of Maryland - Department of Finance ( email )
Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States
HOME PAGE: http://www.rhsmith.umd.edu/finance/faculty/hoberg.aspx
H. Nejat Seyhun
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5463 (Phone)
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