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

See all articles by Yoshiaki Ogura

Yoshiaki Ogura

Waseda University, Faculty of Political Science and Economics

Date Written: March 20, 2015

Abstract

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

Ogura, Yoshiaki, The Certification Role of Pre-IPO Banking Relationships: IPO Underpricing and Post-IPO Performance in Japan (March 20, 2015). Waseda Institute Political Economy Working Paper Series, No. E1423. Available at SSRN: https://ssrn.com/abstract=2392246 or http://dx.doi.org/10.2139/ssrn.2392246

Yoshiaki Ogura (Contact Author)

Waseda University, Faculty of Political Science and Economics ( email )

1-6-1 Nishi-waseda, Shinjuku-ku
Tokyo
Japan

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