The Information Advantage of Underwriters in IPOs
Forthcoming, Management Science
48 Pages Posted: 17 Mar 2014 Last revised: 18 Sep 2019
Date Written: May 19, 2018
Using a unique dataset of dealer-level trading data in bookbuilding IPOs, we find strong evidence that lead underwriter trades in IPO firms are significantly related to subsequent IPO abnormal returns. This relation is concentrated among issues in which underwriters’ information advantage is likely greater, specifically among IPOs with higher information asymmetry or subject to higher investor sentiment and among underwriters with the most industry experience. In contrast, we find no similar relation for trades by other syndicate members, who are not involved in due diligence or pricing, or around auction IPOs, which are characterized by less underwriter involvement. Our results are consistent with the joint hypothesis that underwriters of bookbuilding IPOs gain unique insight on the values of these client firms, and that they trade on this information advantage.
Keywords: IPO, underwriter, information advantage, proprietary trading, bookbuilding, auction, IPO method, investment bank
JEL Classification: G14, G15, G18, G24, G32
Suggested Citation: Suggested Citation