The Certification Role of Pre-IPO Banking Relationships: IPO Underpricing and Post-IPO Performance in Japan
Waseda Institute Political Economy Working Paper Series, No. E1423
52 Pages Posted: 7 Feb 2014 Last revised: 21 May 2015
Date Written: March 20, 2015
We find empirical evidence that pre-IPO relationships with commercial banks through lending and investment via their venture capital subsidiaries significantly reduces IPO underpricing, whereas the affiliation between a lead underwriter and venture backing the IPO company does not. We also obtain evidence for lower post-IPO risk and return for firms with a pre-IPO banking relationship. These findings suggest that a pre-IPO banking relationship certifies the low risk of an IPO firm, whereas investors' concerns about conflicts of interest are not significant. Given the fact that institutional investors are a minority in the allocation of IPO stocks in Japan, the former effect is expected to come mainly from reducing either the investors' winner's curse or the signaling incentive of IPO firms, rather than from the reduction in the information rent for institutional investors participating in the book-building process.
Keywords: IPO underpricing, winner's curse, information revelation, conflict of interests, relationship banking
JEL Classification: G21, L14, D82
Suggested Citation: Suggested Citation