What IPO Order Flow Reveals about the Role of the Underwriter

International Journal of Managerial Finance, Vol. 5, No. 1, pp. 16-49, 2009

51 Pages Posted: 3 Apr 2009

See all articles by Michael J. Aitken

Michael J. Aitken

Macquarie Graduate School of Management

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Kathryn Wong

affiliation not provided to SSRN

Date Written: July 3, 2007

Abstract

IPO underwriter-brokers dominate aftermarket trading but often follow rather than lead in price discovery. This suggests that the underwriter shares a certification, external monitoring, and signaling role with aftermarket brokers, venture capitalists, and founder-owners retaining equity. In this paper we investigate the cross-sectional determinants of the role of the underwriter in aftermarket price discovery. The underwriters' role expands with greater issue uncertainty and diminishes with venture capitalist involvement and greater retention. Issue uncertainty is measured in pages of idiosyncratic risk factors and in the delay between the announcement and completion of the issue. Our first novel result is that verifiable facts are not a substitute for, but a complement to, underwriter certification and advice. Specifically, the underwriter's contribution to price discovery increases with the number of supplier and customer contracts reported in the prospectus. Secondly, the underwriter's role in price discovery declines when the IPO is first in a new technology or product space. These findings indicate that the verification process (not de novo information production) is the key function of the underwriter.

Keywords: Initial public offering, IPO, underwriter, venture capitalist

JEL Classification: G24, G32

Suggested Citation

Aitken, Michael J. and Harris, Frederick (Rick) H. deB. and McInish, Thomas H. and Wong, Kathryn, What IPO Order Flow Reveals about the Role of the Underwriter (July 3, 2007). International Journal of Managerial Finance, Vol. 5, No. 1, pp. 16-49, 2009. Available at SSRN: https://ssrn.com/abstract=1372753

Michael J. Aitken

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Frederick (Rick) H. deB. Harris (Contact Author)

Wake Forest University ( email )

2601 Wake Forest Road
Babcock Graduate School of Management
Winston-Salem, NC 27109
United States
336-758-5112 (Phone)

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

Kathryn Wong

affiliation not provided to SSRN

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