The Certification Role of Large Customers in the New Issues Market

63 Pages Posted: 7 Dec 2008

See all articles by William C. Johnson

William C. Johnson

University of Massachusetts Lowell - The Robert J. Manning School of Business

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Sangho Yi

affiliation not provided to SSRN

Date Written: December 4, 2008

Abstract

Using a sample of 1,429 IPOs from 1997 to 2005, this paper examines the certification role of large customers in the new issues market. We find that IPO firms that have product market relationships with large customers experience higher valuation at the time of their IPOs compared to those without such relationships. This higher valuation is more pronounced when product market relationships are able to alleviate IPO uncertainties or ease product market frictions, when synergistic gains from the relationships are larger, and when large customers have stronger certifying abilities. We also find that IPO valuation is higher when product market relationships are effectively governed by interfirm arrangements such as customer equity ownership in IPO firms, long-term purchase agreements, and strategic alliances. The results are remarkably similar when we examine post-IPO long-run operating performance instead of IPO valuation. Finally, we find that large customers realize significant positive abnormal returns around their suppliers' preliminary prospectus filing dates, suggesting that some of the benefits from product market relationships accrue to large customers.

Keywords: IPOs, product market relationships, certification

Suggested Citation

Johnson, William C. and Kang, Jun-Koo and Yi, Sangho, The Certification Role of Large Customers in the New Issues Market (December 4, 2008). Available at SSRN: https://ssrn.com/abstract=1311534 or http://dx.doi.org/10.2139/ssrn.1311534

William C. Johnson (Contact Author)

University of Massachusetts Lowell - The Robert J. Manning School of Business ( email )

One University Avenue
Lowell, MA 01854
United States

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Sangho Yi

affiliation not provided to SSRN ( email )

No Address Available

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