Clustered IPOs as a Commitment Device

Abstract

I model the strategic interaction of underwriters in accepting IPO mandates of firms with correlated values. Underwriters act as certifiers and increase the perceived value of issuing firms. Investors, however, take the agency conflict associated with the fee-paying structure of IPOs into account and discount the offer price accordingly. By timely clustering of related IPOs across different underwriters, investment banks expose themselves to the outcome of other concurrent IPOs resulting in a mutual disciplining effect. In this way, underwriters can credibly commit themselves to the marketing of high-value firms only. The model suggests that underpricing levels might be a function of underwriter syndicate composition and provides an agency-based rationale for the
observed cyclicality in IPOs.

Keywords: Commitment Device, Underpricing, IPO waves, Underwriter Syndicate

JEL Classification: G24, G32