Underwriter’s Compensation, Marketing Effects, and IPO Performance: Evidence From China
64 Pages Posted: 2 Aug 2019 Last revised: 29 Aug 2019
Date Written: July 1, 2019
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: Suggested Citation