Clustered IPOs as a Commitment Device

Abstract

As intermediaries between issuing firms and primary market investors, underwriters face many conflicts of interest in IPOs. Firms' and investors' skepticism about the underwriters' precise incentives is detrimental, as their joint participation is crucial for a well-functioning IPO process. By coordinating the timing of IPOs with different underwriters, an investment bank exposes itself to the outcome of other concurrent issuances, offering the involved parties more information to gauge the prevalence of agency conflicts. The model provides an agency-based rationale for the cyclicity of IPOs and predicts that underpricing levels are a function of market-wide underwriter syndicate composition.

Keywords: Commitment Device, Underpricing, IPO waves, Underwriter Syndicate

JEL Classification: G24, G32