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Signalling by underwriter retention rate in the IPO market

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  • Hsuan-Chi Chen
  • Cyuan-Jhan Jhou
  • Hsiu-Chuan Yeh

Abstract

Underwriters in Taiwan have to purchase 10-25% of shares offered in initial public offerings (IPOs) for their own accounts. We present a signalling model showing that the underwriter retention rate can serve as a signal of firm value to investors because underwriters are investors as well. This mechanism can reduce information asymmetry between issuers and investors. The model shows that when underwriters retain more proportion of IPO shares, in equilibrium, the initial return is greater and the subscription success rate is lower. We further test the propositions using 616 IPO firms in Taiwan for the period 1998-2004. Overall, the empirical results support the propositions developed from the signalling model.

Suggested Citation

  • Hsuan-Chi Chen & Cyuan-Jhan Jhou & Hsiu-Chuan Yeh, 2007. "Signalling by underwriter retention rate in the IPO market," Applied Economics, Taylor & Francis Journals, vol. 39(15), pages 1973-1983.
    • Handle: RePEc:taf:applec:v:39:y:2007:i:15:p:1973-1983
    DOI: 10.1080/00036840600706987
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    Cited by:

    1. Hsuan-Chi Chen & Sheng-Ching Wu, 2015. "Who Makes the Choice on IPO Underwriting Methods? Issuers Versus Underwriters," Financial Management, Financial Management Association International, vol. 44(4), pages 753-783, October.
    2. Cheng Lu & Lanfeng Kao & Anlin Chen, 2012. "The effects of R&D, venture capital, and technology on the underpricing of IPOs in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 39(4), pages 423-445, November.
    3. Gili Yen & Ching-Lung Chen, 2009. "Partial auction, pricing information and price adjustment in the IPO's aftermarket: an empirical study of TAIEX-listing firms," Applied Financial Economics, Taylor & Francis Journals, vol. 19(8), pages 669-680.
    4. Charles Ka Yui Leung & Edward Chi Ho Tang, 2015. "Speculating China Economic Growth through Hong Kong? Evidence from Stock Market IPOs and Real Estate Markets," International Real Estate Review, Global Social Science Institute, vol. 18(1), pages 45-87.

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