Relationship Specific Investments in Customers and Suppliers through Directed Share Programs in IPOs (earlier circulated as) Directed Share Programs in IPO Underwriting Contracts - Agency Problem or Supply Assurance?
77 Pages Posted: 2 Aug 2006 Last revised: 15 Jan 2018
Date Written: October 30, 2007
We provide evidence that firms do not make product and capital market decisions in isolation. When a firm sells severely underpriced new equity for exogenous reasons, managers transfer some of the cash – about six million dollars, or 8 % of the capital raised – that would otherwise have been “left on the table” to the firm’s customers and suppliers, thus contradicting the prospect-theory based behavioral bias hypothesis for such underpricing. Such transfer does not exacerbate the new equity underpricing problem; rather, an increase in expected underpricing results in additional transfer to issuing firms stakeholders. The existence of long-term purchase and supply agreements is the primary predictor of whether firms make relationship-specific investments in their external stakeholders but not research, technical, and marketing collaboration with customers or suppliers, long product/business-development/sales cycle, reliance on the intellectual property of the suppliers, supplier monopoly, or input rationing. Issuing firm’s managers value their product market relationships more than the ones with their underwriters and the lead underwriter’s institutional clientele lose from these investments.
Keywords: agency problem, contracts, customers and suppliers, IPO, relationship-specific investments
JEL Classification: G24, G30, L14
Suggested Citation: Suggested Citation