Underwriter Compensation, Marketing Effects, Investor Attention, and IPO Performance

Abstract

The literature suggests that underwriters perform significant marketing functions in securities offerings. We argue that underwriter’s efforts related to marketing can be estimated by the abnormal component of IPO underwriting spread. This is feasible using a large sample of Chinese IPOs, which demonstrate a significant cross-sectional variation in underwriting spreads relative to highly clustered spreads in the U.S. We find that underwriter’s 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 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.

Keywords: Underwriter Compensation, Marketing Effects, Investor Attention, IPO Performance

JEL Classification: K2; G24; G34