Do Underwriters Collaborate with Venture Capitalists in Ipos? Implications and Evidence

52 Pages Posted: 24 Mar 2005 Last revised: 7 Apr 2009

Gerard Hoberg

University of Southern California - Marshall School of Business

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business

Date Written: April 6, 2009

Abstract

We test for potential collaboration between underwriters, venture capitalists, and other major owner managers in initial public offerings (IPOs). We find that VCs who are more loyal and tolerate higher underpricing receive long-term marketing support and favorable analyst revisions, allowing them to exit at high prices. Cooperating underwriters receive repeat business and more profits from allocating underpriced shares. The end of this extended support coincides with heavy insider selling and significantly negative abnormal returns. VCs enforce cooperation by switching lead underwriters when favors are not returned. Our collaboration hypothesis resolves some previously surprising findings regarding underpricing, long-term underperformance, insider trading patterns, and analyst research.

Keywords: IPOs, initial public offerings, intial returns, collaboration, venture capital, underwriter, strategic alliances, quid pro quos

Suggested Citation

Hoberg, Gerard and Seyhun, H. Nejat, Do Underwriters Collaborate with Venture Capitalists in Ipos? Implications and Evidence (April 6, 2009). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=690421 or http://dx.doi.org/10.2139/ssrn.690421

Gerard Hoberg (Contact Author)

University of Southern California - Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

H. Nejat Seyhun

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-5463 (Phone)

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