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The Role of Underwriter-Investor Relationships in the IPO Process

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  • Binay, Murat M.
  • Gatchev, Vladimir A.
  • Pirinsky, Christo A.

Abstract

We find that in allocating initial public offerings (IPOs), underwriters favor institutions they have previously worked with. Regular investors benefit more than casual investors in IPOs through greater participation in underpriced issues. Relationship participation is more important in the distribution of IPOs with stronger demand, IPOs of less liquid firms, and deals by less reputable underwriters. Overall, our results are consistent with book-building theories of IPOs. Interestingly, for 1999–2000 we find that regular investors receive even more underpriced IPOs relative to previous years while we do not find evidence that they provide additional services in IPOs.

Suggested Citation

  • Binay, Murat M. & Gatchev, Vladimir A. & Pirinsky, Christo A., 2007. "The Role of Underwriter-Investor Relationships in the IPO Process," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(3), pages 785-809, September.
    • Handle: RePEc:cup:jfinqa:v:42:y:2007:i:03:p:785-809_00
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    Cited by:

    1. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
    2. Yue Cai, 2021. "Measuring Market Power in the IPO Underwriter," Working Papers 2108, Waseda University, Faculty of Political Science and Economics.
    3. Jun Qi & Qinwei Chi & Ni Yang & Junyan Ouyang, 2023. "The Impact of the Tone of a Prospectus on IPO Underpricing: Evidence from China," Australian Accounting Review, CPA Australia, vol. 33(4), pages 375-390, December.
    4. Wenjun Wang, 2023. "Can experience mitigate precautionary bidding? Evidence from a quasi-experiment at an IPO auction," Journal of Asset Management, Palgrave Macmillan, vol. 24(2), pages 148-163, March.
    5. Chen Su, 2018. "The efficiency of IPO issuing mechanisms and market conditions: evidence in China," Review of Quantitative Finance and Accounting, Springer, vol. 51(2), pages 461-495, August.
    6. Chuluun, Tuugi, 2015. "The role of underwriter peer networks in IPOs," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 62-78.
    7. Brian J. Henderson & Heather Tookes, 2012. "Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues," Management Science, INFORMS, vol. 58(12), pages 2272-2291, December.
    8. Wenjun Wang, 2024. "You scratch my back and i scratch yours: evidence from relationship-based bidding in IPO auctions," Review of Quantitative Finance and Accounting, Springer, vol. 62(4), pages 1593-1613, May.
    9. Zhang, Chunqiang & Gao, Lu & Gao, Xi & Chan, Kam C., 2022. "Do underwriters with foreign shareholders help protect bond investors? Evidence from bond covenants in China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    10. Samdani, Taufique, 2019. "Anchor-backed IPOs, reported earnings, and heterogeneous investors' beliefs," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 72-87.
    11. Sharma, Aarti & Singhal, Ankit & Ramanna, Vishwanatha Saragur, 2024. "The effect of lead institutional investors on investment and capital structure of young firms: Evidence from Indian IPOs," International Review of Financial Analysis, Elsevier, vol. 91(C).
    12. Nikolova, Stanislava & Wang, Liying & Wu, Juan (Julie), 2020. "Institutional allocations in the primary market for corporate bonds," Journal of Financial Economics, Elsevier, vol. 137(2), pages 470-490.
    13. Rama Seth & S. R. Vishwanatha & Durga Prasad, 2019. "Allocation to Anchor Investors, Underpricing, and the After‐Market Performance of IPOs," Financial Management, Financial Management Association International, vol. 48(1), pages 159-186, March.
    14. Heather Tookes & Brian Henderson, 2010. "Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues," Yale School of Management Working Papers amz2667, Yale School of Management.
    15. Marco Cucculelli & Manuela Geranio & Camilla Mazzoli & Sabrina Severini, 2021. "IPO Pricing and Dealers’ Interaction: A Stochastic Frontier Approach," International Business Research, Canadian Center of Science and Education, vol. 14(1), pages 1-1, January.
    16. Sergey S. Barabanov & Onem Ozocak & Kuntara Pukthuanthong & Thomas J. Walker, 2013. "Underwriters And The Broken Chinese Wall: Institutional Holdings And Post-Ipo Securities Litigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 36(4), pages 543-578, December.
    17. Bajo, Emanuele & Barbi, Massimiliano & Petrella, Giovanni, 2017. "Do firms get what they pay for? A second thought on over-allotment option in IPOs," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 219-232.

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