Underwriter’s Compensation, Marketing Effects, and IPO Performance: Evidence From China

64 Pages Posted: 2 Aug 2019 Last revised: 29 Aug 2019

See all articles by Louis T. W. Cheng

Louis T. W. Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Siyuan Yan

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: July 1, 2019

Abstract

The literature and industry practice suggest that IPO underwriters perform significant marketing functions in the IPO process. In this paper, we document that underwriter’s efforts are correlated with positive marketing effects, leading to better IPO valuation and post-listing financial performance. Based on a sample of 1,436 Chinese IPOs during 2005-2015, we construct an expected model to extract the abnormal IPO underwriting spread from the overall underwriter’s compensation as the proxy for underwriter’s efforts. First, underwriter’s efforts produce significant short-term marketing effects proxied by pre-IPO institutional investors’ participation, offer price up-ward revision and long-term marketing effects in terms of analyst’s coverage, media coverage, and institutional holdings. Next, we show that these marketing-driven underwriter’s efforts are negatively associated with IPO underpricing and positively correlated with the firm’s post-listing liquidity and various post-listing financial performance measures.

Keywords: underwriter’s compensation, marketing effects, IPO Underpricing, long-term IPO performance

JEL Classification: K2; G24; G34

Suggested Citation

Cheng, Louis T. W. and Hu, Gang and Yan, Siyuan, Underwriter’s Compensation, Marketing Effects, and IPO Performance: Evidence From China (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3431008 or http://dx.doi.org/10.2139/ssrn.3431008

Louis T. W. Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

Siyuan Yan (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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