Local Underwriter Oligopolies and IPO Underpricing

52 Pages Posted: 27 Nov 2009 Last revised: 4 Mar 2011

See all articles by Xiaoding Liu

Xiaoding Liu

Texas A&M University - Department of Finance

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: February 28, 2011

Abstract

We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.

Keywords: IPOs, Underwriters, Oligopoly, Venture Capital, Analysts

JEL Classification: G24

Suggested Citation

Liu, Xiaoding and Ritter, Jay R., Local Underwriter Oligopolies and IPO Underpricing (February 28, 2011). Available at SSRN: https://ssrn.com/abstract=1512554 or http://dx.doi.org/10.2139/ssrn.1512554

Xiaoding Liu

Texas A&M University - Department of Finance ( email )

Texas A&M University
College Station, TX 77843
United States

Jay R. Ritter (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://https://site.warrington.ufl.edu/ritter

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