Does Marketing Matter in Financial Markets? Underwriter Compensation, Marketing Effects, Investor Attention, and IPO Performance
68 Pages Posted: 2 Aug 2019 Last revised: 28 Feb 2020
Date Written: February 28, 2020
The literature (e.g., Gao and Ritter, 2010) and industry practices suggest that underwriters perform significant marketing functions of financial securities. We proxy for underwriter’s marketing efforts by estimating the abnormal component of IPO underwriting spread. This is feasible among a large sample of Chinese IPOs, where we find significant cross-sectional variation in underwriting spreads, unlike in the U.S., where spreads are highly clustered. We find that underwriter’s marketing efforts produce short-term marketing effects as measured by pre-IPO institutional investors’ participation and offer price up-ward revision. Moreover, we document that underwriter’s marketing efforts enhance the persistence of investor attention in the long run. We show that abnormal underwriting spread is positively associated with various measures of post-IPO investor attention including analyst coverage, media coverage, the number of institutional investors holding the stock, as well as aftermarket liquidity. Further, we show that underwriter’s efforts are negatively associated with IPO underpricing and positively related to total firm value. Finally, we also document that IPO underwriting spreads have increased over time in China, and in recent years have surpassed “the seven percent solution” documented by Chen and Ritter (2000) in the U.S.
Keywords: underwriter’s compensation, marketing effects, investor attention, IPO underpricing
JEL Classification: K2, G24, G34
Suggested Citation: Suggested Citation