The Certification Role of Large Customers in the New Issues Market
63 Pages Posted: 7 Dec 2008
Date Written: December 4, 2008
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
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