Underwriter Quality and Long-Run IPO Performance
Accepted in Financial Management
52 Pages Posted: 11 Feb 2009 Last revised: 15 Dec 2010
Date Written: July 25, 2010
We analyze the relationship between the quality of underwriters and the long-run performance of IPOs in the light of underwriter marketing, certification and screening, and information production. We find that higher underwriter quality (measured by the number of managing underwriters, underwriter reputation and absolute price adjustment) predicts better long-run performance, even when returns are value-weighted. We run a horse race between underwriter quality measures and find the effects of the number of managing underwriters and underwriter reputation are mutually complementary and especially strong among IPOs with high uncertainty, while absolute price adjustment – which is more likely to be associated with information production than marketing or certification/screening – loses significance. Our findings are consistent with the marketing, certification and screening roles of investment banks, but lend little support for the information production role of underwriters.
Keywords: information production, uncertainty, long-run performance, IPOs
JEL Classification: G12, G14, G24
Suggested Citation: Suggested Citation