Allocation Discretion, Information Sharing and Underwriter Syndication

61 Pages Posted: 23 Jul 2018

See all articles by Nirav Parikh

Nirav Parikh

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing

Vijaya Marisetty

University of Twente; University of Hyderabad

Monica Tan

RMIT University; Financial Research Network (FIRN)

Date Written: July 20, 2018

Abstract

The competitiveness of the IPO underwriting market suffers from the concentration of restricted mandates in the hands of a limited number of underwriters with good reputations. Academic research has focused extensively on the relationship between underpricing and the influence of an individual underwriter. However, we have only scant research on the effect of IPO syndication on underpricing. Nevertheless, most IPOs are managed by underwriters operating as an IPO syndicate. Here, we contribute to an analysis of underwriting syndicates by examining 329 IPOs issued in the Indian IPO market in the period 2000-10 that were made subject to either a discretionary or a proportionate allocation regime.

We find that the underwriting market in India is highly concentrated and is dominated by a few large and reputable underwriters who have ongoing relationships amongst themselves to manage IPOs. This highlights a potential entry barrier for new underwriters. We find that underwriters form large syndicates when the issue size is large. Also, we do not find any evidence that the motivation for underwriters to form a syndicate is due to market risk sharing or price manipulation. We conclude that underwriters syndicate to share the inventory risk of an IPO.

When allocation discretion is regulated, and the risk of managing an IPO is high, we observe that the size of an underwriting syndicate is smaller. However, the results support the role of institutional subscription acting as a mediating factor for reputable underwriters to syndicate. Able to share the risk in this way, the syndicate partnership benefits the issuer with lower underpricing. Overall, we conclude that regulatory intervention is positive for market welfare due to lower underpricing. We also find that in the absence of allocation discretion, syndication by reputable underwriters acts as an effective medium of discretion for higher information and risk sharing.

Keywords: Allocation Discretion, IPO Syndicate, Institutional Investors, Underwriter Reputation, Reputation-based Syndication, IPO Underpricing.

JEL Classification: D85, G14, G28

Suggested Citation

Parikh, Nirav Y. and Marisetty, Vijaya and Tan, Monica, Allocation Discretion, Information Sharing and Underwriter Syndication (July 20, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3217770 or http://dx.doi.org/10.2139/ssrn.3217770

Nirav Y. Parikh (Contact Author)

Royal Melbourne Institute of Technolog (RMIT University) - School of Economics, Finance and Marketing ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Vijaya Marisetty

University of Twente ( email )

Postbus 217
Enschede
Netherlands
+91622254326 (Phone)

University of Hyderabad ( email )

Central University (PO)
Andhra Pradesh
Hyderabad, CA Andhra Pradesh 500 046
India

Monica Tan

RMIT University ( email )

35 Herlihys Rd
Templestowe Lower, 3107
Australia
403388233 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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