IDEAS home Printed from https://ideas.repec.org/a/eee/bracre/v47y2015i4p445-470.html
   My bibliography  Save this article

Does institutional reform improve the impact of investment bank reputation on the long-term stock performance of initial public offerings?

Author

Listed:
  • Su, Chen

Abstract

This study examines the impact of investment bank (IB) reputation on the long-term stock price performance of Chinese initial public offerings (IPOs) over the period 1993 to 2010. For comparison purposes, the whole sample period is separated into two sub-periods by the 2001 IPO allocation system reform: the quota system period from January 1st, 1993 to April 22nd, 2001 (hereafter, the pre-reform period) and the approval system period from April 23rd, 2001 to December 31st, 2010 (hereafter, the post-reform period). Using two time-varying proxies for IB reputation, we find no impact of IB reputation on the three-year buy-and-hold abnormal returns (BHARs) during the pre-reform period, but a significantly positive impact during the post-reform period. Our results are robust to various alternative methodological approaches in controlling for the problem of endogeneity and the cross-sectional correlations in abnormal returns.

Suggested Citation

  • Su, Chen, 2015. "Does institutional reform improve the impact of investment bank reputation on the long-term stock performance of initial public offerings?," The British Accounting Review, Elsevier, vol. 47(4), pages 445-470.
    • Handle: RePEc:eee:bracre:v:47:y:2015:i:4:p:445-470
    DOI: 10.1016/j.bar.2015.09.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0890838915000384
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.bar.2015.09.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. FranÁois Derrien & Kent L. Womack, 2003. "Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 31-61.
    2. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
    3. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    4. Brav, Alon & Geczy, Christopher & Gompers, Paul A., 2000. "Is the abnormal return following equity issuances anomalous?," Journal of Financial Economics, Elsevier, vol. 56(2), pages 209-249, May.
    5. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    6. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    7. Kalok Chan & Albert J. Menkveld & Zhishu Yang, 2008. "Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount," Journal of Finance, American Finance Association, vol. 63(1), pages 159-196, February.
    8. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    9. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    10. Chitru S. Fernando & Vladimir A. Gatchev & Paul A. Spindt, 2005. "Wanna Dance? How Firms and Underwriters Choose Each Other," Journal of Finance, American Finance Association, vol. 60(5), pages 2437-2469, October.
    11. McCahery, Joseph & Schwienbacher, Armin, 2010. "Bank reputation in the private debt market," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 498-515, September.
    12. Alexander P. Ljungqvist & Tim Jenkinson & William J. Wilhelm, Jr., 2003. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 63-99.
    13. Beatty, Randolph P & Welch, Ivo, 1996. "Issuer Expenses and Legal Liability in Initial Public Offerings," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 545-602, October.
    14. Lily Hua Fang, 2005. "Investment Bank Reputation and the Price and Quality of Underwriting Services," Journal of Finance, American Finance Association, vol. 60(6), pages 2729-2761, December.
    15. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March.
    16. Chan, Kalok & Wang, Junbo & Wei, K. C. John, 2004. "Underpricing and long-term performance of IPOs in China," Journal of Corporate Finance, Elsevier, vol. 10(3), pages 409-430, June.
    17. Paul A. Gompers & Josh Lerner, 2003. "The Really Long‐Run Performance of Initial Public Offerings: The Pre‐Nasdaq Evidence," Journal of Finance, American Finance Association, vol. 58(4), pages 1355-1392, August.
    18. repec:bla:jfinan:v:53:y:1998:i:1:p:285-311 is not listed on IDEAS
    19. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    20. John W. Cooney & Hideaki Kiyoshi Kato & James S. Schallheim, 2003. "Underwriter Certification and Japanese Seasoned Equity Issues," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 949-982, July.
    21. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    22. Booth, James R. & Smith, Richard II, 1986. "Capital raising, underwriting and the certification hypothesis," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 261-281.
    23. Baron, David P, 1982. "A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues," Journal of Finance, American Finance Association, vol. 37(4), pages 955-976, September.
    24. Brav, Alon & Gompers, Paul A, 1997. "Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    25. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1995. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 139-140, May.
    26. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    27. repec:bla:jfinan:v:58:y:2003:i:2:p:483-518 is not listed on IDEAS
    28. Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
    29. Eric Maskin & Yingyi Qian & Chenggang Xu, 2000. "Incentives, Information, and Organizational Form," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 359-378.
    30. Habib, Michel A & Ljungqvist, Alexander P, 2001. "Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 433-458.
    31. Carter, Richard B & Manaster, Steven, 1990. "Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    32. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    33. Tian, Xuan, 2011. "The causes and consequences of venture capital stage financing," Journal of Financial Economics, Elsevier, vol. 101(1), pages 132-159, July.
    34. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    35. John D. Lyon & Brad M. Barber & Chih‐Ling Tsai, 1999. "Improved Methods for Tests of Long‐Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, February.
    36. Megginson, William L & Weiss, Kathleen A, 1991. "Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    37. Michaely, Roni & Shaw, Wayne H, 1994. "The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories," The Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 279-319.
    38. Lee, Gemma & Masulis, Ronald W., 2011. "Do more reputable financial institutions reduce earnings management by IPO issuers?," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 982-1000, September.
    39. Mario Levis, 2011. "The Performance of Private Equity‐Backed IPOs," Financial Management, Financial Management Association International, vol. 40(1), pages 253-277, March.
    40. Aharony, J & Lee, CWJ & Wong, TJ, 2000. "Financial packaging of IPO firms in China," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 103-126.
    41. Wang, Qian & Wong, T.J. & Xia, Lijun, 2008. "State ownership, the institutional environment, and auditor choice: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 112-134, September.
    42. repec:bla:jfinan:v:59:y:2004:i:6:p:2903-2958 is not listed on IDEAS
    43. Su, Chen & Brookfield, David, 2013. "An evaluation of the impact of stock market reforms on IPO under-pricing in China: The certification role of underwriters," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 20-33.
    44. Paul Schultz, 2003. "Pseudo Market Timing and the Long‐Run Underperformance of IPOs," Journal of Finance, American Finance Association, vol. 58(2), pages 483-517, April.
    45. Chao Chen & Haina Shi & Haoping Xu, 2013. "Underwriter Reputation, Issuer Ownership, and Pre-IPO Earnings Management: Evidence from China," Financial Management, Financial Management Association International, vol. 42(3), pages 647-677, September.
    46. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    47. Su, Chen & Bangassa, Kenbata, 2011. "The impact of underwriter reputation on initial returns and long-run performance of Chinese IPOs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 760-791.
    48. Ming Dong & Jean‐Sébastien Michel & J. Ari Pandes, 2011. "Underwriter Quality and Long‐Run IPO Performance," Financial Management, Financial Management Association International, vol. 40(1), pages 219-251, March.
    49. James, Christopher, 1992. "Relationship-Specific Assets and the Pricing of Underwriter Services," Journal of Finance, American Finance Association, vol. 47(5), pages 1865-1885, December.
    50. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
    51. Joseph Aharony & Chan†Jane Lin & Martin P. Loeb, 1993. "Initial Public Offerings, Accounting Choices, and Earnings Management," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 61-81, September.
    52. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    53. Jenkinson, Tim & Ljungqvist, Alexander, 2001. "Going Public: The Theory and Evidence on How Companies Raise Equity Finance," OUP Catalogue, Oxford University Press, edition 2, number 9780198295990.
    54. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    55. Perry, Susan E. & Williams, Thomas H., 1994. "Earnings management preceding management buyout offers," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 157-179, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen Su, 2021. "A comprehensive investigation into style momentum strategies in China," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 35(1), pages 101-144, March.
    2. Duxbury, Darren & Yao, Songyao, 2017. "Are investors consistent in their trading strategies? An examination of individual investor-level data," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 77-87.
    3. 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.
    4. Tiziana La Rocca, 2021. "Do prestigious underwriters shape IPO pricing? A meta-analytic review," Review of Managerial Science, Springer, vol. 15(3), pages 573-609, April.
    5. Lyu, Huaili & Jia, Wanjiao & Tan, Xiulin, 2023. "Individual investment banker human capital and SEO discount: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    6. Chen, Li-Yu & Lai, Jung-Ho & Chang, Shao-Chi, 2022. "Strategic networks, certification, and initial public offerings," International Review of Financial Analysis, Elsevier, vol. 83(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Su, Chen & Bangassa, Kenbata, 2011. "The impact of underwriter reputation on initial returns and long-run performance of Chinese IPOs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 760-791.
    2. Su, Chen & Brookfield, David, 2013. "An evaluation of the impact of stock market reforms on IPO under-pricing in China: The certification role of underwriters," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 20-33.
    3. Dorsman, André & Gounopoulos, Dimitrios, 2013. "European Sovereign Debt Crisis and the performance of Dutch IPOs," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 308-319.
    4. Fernando, Chitru S. & Gatchev, Vladimir A. & May, Anthony D. & Megginson, William L., 2015. "Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 41-63.
    5. Benzoni, Luca & Schenone, Carola, 2010. "Conflict of interest and certification in the U.S. IPO market," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 235-254, April.
    6. Fouad Jamaani & Manal Alidarous, 2019. "Review of Theoretical Explanations of IPO Underpricing," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 6(1), pages 1-18.
    7. Hoque, Hafiz & Mu, Shaolong, 2021. "Does a reduction of state control affect IPO underpricing? Evidence from the Chinese A-share market," Journal of International Money and Finance, Elsevier, vol. 115(C).
    8. Agathee, Ushad Subadar & Sannassee, Raja Vinesh & Brooks, Chris, 2012. "The underpricing of IPOs on the Stock Exchange of Mauritius," Research in International Business and Finance, Elsevier, vol. 26(2), pages 281-303.
    9. Natalia Matanova & Tanja Steigner & Bingsheng Yi & Qiancheng Zheng, 2019. "Going concern opinions and IPO pricing accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 195-238, July.
    10. Maher Kooli & Jean-Marc Suret, 2001. "The Underpricing of Initial Public Offerings: Further Canadian Evidence," CIRANO Working Papers 2001s-50, CIRANO.
    11. Ranganathan, Kavitha & Saraogi, Aayush, 2021. "What explains voluntary premarket underpricing and aftermarket mispricing in Indian IPOs?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    12. Reber, Beat, 2017. "Does mispricing, liquidity or third-party certification contribute to IPO downside risk?," International Review of Financial Analysis, Elsevier, vol. 51(C), pages 25-53.
    13. Hoechle, Daniel & Karthaus, Larissa & Schmid, Markus, 2017. "The Long-Term Performance of IPO’s, Revisited," Working Papers on Finance 1706, University of St. Gallen, School of Finance.
    14. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    15. Schuster, Josef Anton, 2003. "The cross-section of European IPO returns," LSE Research Online Documents on Economics 24859, London School of Economics and Political Science, LSE Library.
    16. Datta, Sudip & Gruskin, Mark & Iskandar-Datta, Mai, 2015. "On post-IPO stock price performance: A comparative analysis of RLBOs and IPOs," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 187-203.
    17. Klein, Peter G. & Wuebker, Robert & Zoeller, Kathrin, 2016. "Relationship banking and conflicts of interest: Evidence from German initial public offerings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 210-221.
    18. Tiziana La Rocca, 2021. "Do prestigious underwriters shape IPO pricing? A meta-analytic review," Review of Managerial Science, Springer, vol. 15(3), pages 573-609, April.
    19. Trauten, Andreas, 2004. "Zur Effizienz von Wertpapieremissionen über Internetplattformen," Working Papers 8, University of Münster, Competence Center Internet Economy and Hybrid Systems, European Research Center for Information Systems (ERCIS).
    20. Feng, Xunan & Johansson, Anders C. & Wei, Dengxi, 2023. "Judging a book by its cover: Analysts and attention-driven price patterns in China's IPO market," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).

    More about this item

    Keywords

    Investment bank reputation; IPO long-term stock performance; IPO allocation system reform; China stock market;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:bracre:v:47:y:2015:i:4:p:445-470. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-british-accounting-review .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.