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Article
Publication date: 1 July 2006

Ehsan H. Feroz, Jarrod Johnston, Jacqueline L. Reck and Earl R. Wilson

The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures…

Abstract

Purpose

The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures in the pricing of initial public offerings (IPOs).

Design/methodology/approach

The study abandons the notion of a homogenous market for IPOs and focuses instead on the differential demand for information across identifiable segments of the IPO market in the pre‐market offering period leading to the first day trading closing prices. Ordinary least square (OLS) regressions were used to test the two hypotheses developed in the paper.

Findings

It was found that firm‐specific risk measures are associated with the initial trading day returns of IPOs managed by low reputation underwriters, but not those by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub‐sample of high‐risk junk IPOs that were marked down in price by the underwriter prior to the offering in order to make them more attractive to investors.

Research limitations

As with all empirical studies the tests are joint tests of the hypotheses stipulated and econometric assumptions underlying OLS. The findings of the study may not be generalized to an unrelated domain.

Practical implications

The findings suggest that ex ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading return on those IPOs.

Originality/value

This is the first study to look at junk IPOs in a systematic manner using a quasi‐experimental design.

Details

Review of Accounting and Finance, vol. 5 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

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Article
Publication date: 16 March 2010

Travis L. Jones and Mushfiq us Swaleheen

The purpose of this paper is to examine the relationship between underwriter reputation and initial public offerings (IPOs) initial returns over a 24‐year period, from…

Abstract

Purpose

The purpose of this paper is to examine the relationship between underwriter reputation and initial public offerings (IPOs) initial returns over a 24‐year period, from 1980 to 2003.

Design/methodology/approach

Two‐stage least‐squares regression analysis on data from IPOs offered from 1980 to 2003 is used to determine how the choice of IPO underwriter is related to initial returns when considering reputation as an endogenous variable.

Findings

This study shows, consistent with prior literature, that underwriter reputation is statistically significantly negatively related to initial returns from 1980 to 1991 and statistically significantly positively related to initial returns from 1992 to 2003, when reputation is taken as an exogenous variable. When considering the choice of the reputation of underwriter as endogenous to characteristics of the firm, the reputation of an underwriter is significantly positively related to IPO initial returns for 1980 to 2003 and 1992 to 2003 and insignificantly related, for 1980 to 1991.

Originality/value

This study adds value to finance literature in that it extends the research on the relationship between IPO initial returns and underwriter reputation. It also furthers the existing research on IPO anomalies and notes characteristics in this field of financial markets that may be important to both issuers and investment banks.

Details

Managerial Finance, vol. 36 no. 4
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 17 August 2015

Bo Liu and Kemin Wang

Prior research on underwriter reputation treats underwriters as the unit of analyzing, while the purpose of this paper is to analyze underwriter reputation effects after…

Abstract

Purpose

Prior research on underwriter reputation treats underwriters as the unit of analyzing, while the purpose of this paper is to analyze underwriter reputation effects after introducing discretion of underwriters’ employees. Specially, this paper investigates the damage on underwriter reputation effects when underwriters’ employees tolerate issuers’ earnings management for their self-interest.

Design/methodology/approach

In 2004, a Chinese security regulation introduced two professional employees from the lead underwriter, known as sponsors, to work as individual financial intermediaries. This paper tests whether the ability of reputable underwriters in restraining issuers from manipulating earnings decreases after the 2004 regulation, given that the regulation encourages sponsors to exchange for their private benefits by ignoring issuers’ earnings management.

Findings

The inverse relation between underwriter reputation and issuers’ earnings management is weakened after the 2004 regulation, especially when underwriters do not employ enough sponsors. Sponsors who have tolerated issuers’ earnings management will win more business in the following years. The influence of underwriter reputation on issuers’ underpricing and post-initial public offering performance is also less significant after the regulation.

Originality/value

This work extends literatures on underwriter reputation from a completely different aspect that emphasizes the self-interest of underwriters’ employees. This paper also has direct policy implications for regulators, especially in the current reform climate that Chinese government is trying to carry out the Registration System.

Details

China Finance Review International, vol. 5 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

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Article
Publication date: 21 November 2016

Chao Chen and Xinrong Wang

The purpose of this paper is to analyze the effect of the reputation of underwriters and sponsoring representatives on initial public offering (IPO) underwriting fees, and…

Abstract

Purpose

The purpose of this paper is to analyze the effect of the reputation of underwriters and sponsoring representatives on initial public offering (IPO) underwriting fees, and further investigates the role of ownership and political connection.

Design/methodology/approach

The methodology includes three models. Model 1 empirically investigates the effect of underwriter’s reputation on underwriting fee. Model 2 studies the effect of sponsoring representative’s reputation on underwriting fee. Model 3 further examines the effect of underwriter’s reputation and sponsoring representative reputation on the underwriting fee controlling for the impact of ultimate controlling ownership and political connection.

Findings

The study documents that underwriters’ and sponsoring representatives’ reputation can result in reputational premiums. In the IPO of state-owned enterprises (SOEs), the reputation of underwriters and sponsoring representatives does not significantly affect the underwriting fees. In the IPO of non-state-owned enterprises (NSOEs), there is a significantly positive correlation between underwriters’ and sponsoring representatives’ reputation and underwriting fees. Further research results show that, on the one hand, the effect of underwriters’ and sponsoring representatives’ reputation on underwriting fees is not significant in the IPO of NSOEs with political connection. On the other hand, underwriting fees are positively associated with underwriters’ and sponsoring representatives’ reputation in the IPO of NSOEs without political connection.

Research limitations/implications

The sponsoring representative’s fee is not disclosed separately, which makes it difficult to distinguish the incremental effect from underwriter’s services and reputation.

Practical implications

NSOEs relative to SOEs are more likely to pay higher underwriting fees for hiring underwriter and sponsoring representative with better reputation during the process of IPO.

Social implications

The reputation of underwriter and sponsoring representative does not matter to SOEs but does matter to NSOEs. However, NSOEs’ political connection affects underwriter fees.

Originality/value

This paper provides new evidence of sponsoring representatives’ reputation and political connection on the underwriting fees in the IPO in Chinese SOEs and NSOEs.

Details

China Finance Review International, vol. 6 no. 4
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 28 May 2020

Chui Zi Ong, Rasidah Mohd-Rashid and Kamarun Nisham Taufil-Mohd

The purpose of this study is to examine the influence of underwriter reputation on the valuation of Malaysian initial public offerings (IPOs).

Abstract

Purpose

The purpose of this study is to examine the influence of underwriter reputation on the valuation of Malaysian initial public offerings (IPOs).

Design/methodology/approach

This study employed cross-sectional multiple regression models to analyse the relationship between underwriter reputation and IPO valuation that included 466 IPOs listed on Bursa Malaysia from 2000 to 2017.

Findings

The results revealed that underwriter reputation had a significant negative association with IPO valuation. Firms that engaged the services of reputable underwriters had their IPO offer prices set lower than the intrinsic values during the listing. After incorporating firms' size, this study found a positive relationship between underwriter reputation and IPO valuation. Big firms (high quality) hired reputable underwriters for certification purposes as issuers were aware that the cost of hiring a reputable underwriter would be justified by increased transparency after listing. Therefore, firms that engaged reputable underwriters had approximately fair values since issuers assumed that the price would be close to the intrinsic value following enhanced transparency post-listing.

Research limitations/implications

Future studies should focus on other non-financial factors, such as auditor reputation.

Originality/value

The present study provides new insights into the certification role of underwriters in valuing IPOs in the Malaysian market.

Details

Managerial Finance, vol. 46 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 18 May 2015

Lerong He, James J. Cordeiro and Tara Shankar Shaw

The purpose of the research is to study how Chief Executive Officer’s (CEO’s) ownership, CEO’s structural and expertise power and underwritersreputation affect the…

Abstract

Purpose

The purpose of the research is to study how Chief Executive Officer’s (CEO’s) ownership, CEO’s structural and expertise power and underwritersreputation affect the initial public offering (IPO) lockup period.

Design/methodology/approach

The study uses the multivariate regression method to test the hypothesis on a sample of 1,071 US IPOs, which comprise 80 per cent of the total population of IPOs over the 1998-2002 period.

Findings

It was found that CEO equity ownership had a direct positive impact and two indicators of CEO positional power (CEO duality, founder status) and underwriter reputation had a direct negative impact on the length of the lockup period that results from IPO negotiations between the issuing firm and the underwriter. It was also found that underwriter reputation negatively moderates the impact of equity ownership (likely due to a substitution effect) and positively moderates the impact of CEO duality on lockup period length (by offsetting the impact of CEO positional power).

Originality/value

Previous studies have exclusively studied the affect of economic factors on IPO lockup. This paper extends the extant literature by studying the insider’s characteristics like CEO’s power and underwriter’s reputation on IPO lockup periods.

Details

Management Research Review, vol. 38 no. 5
Type: Research Article
ISSN: 2040-8269

Keywords

Content available
Article
Publication date: 18 March 2019

Sheela Devi D. Sundarasen

This paper aims to provide empirical evidence on the extent of alteration institutional characteristics, i.e. legal origin and corruption levels, may have on the signaling…

Abstract

Purpose

This paper aims to provide empirical evidence on the extent of alteration institutional characteristics, i.e. legal origin and corruption levels, may have on the signaling effects of auditors’ reputation, underwritersreputation and ownership retention on initial public offering (IPO) initial returns in OECD countries.

Design/methodology/approach

Cross-sectional data composed of 6,182 IPOs from 30 OECD countries are used for 2003-2012. Ordinary least square with multiple linear regressions is used to test the hypotheses.

Findings

The findings indicate that the legal framework and corruption level of a country alters the signaling effects of underwritersreputation, auditors’ reputation and ownership retention in an IPO environment. These three variables mitigate information asymmetry, signal firm value to potential investors and ultimately decrease IPO initial returns. This relationship is more significant in the civil law countries. Corruption levels negatively moderate the relationship in the common law and Scandinavian civil law countries but have no significance in the German and French civil law countries, indicating the importance of the signaling variables in these two civil law countries.

Originality/value

This study examines the extent of the alterations that the legal framework and the corruption levels cause to the signaling relationship between auditors’ reputation, underwritersreputation and ownership retention on IPO initial returns in selected OECD countries.

Details

PSU Research Review, vol. 3 no. 1
Type: Research Article
ISSN: 2399-1747

Keywords

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Article
Publication date: 30 July 2019

Ali Albada, Soo-Wah Low and Othman Yong

The purpose of this paper is to examine the effects of prestige signals measured by the reputations of the underwriter, auditor and board size on the heterogeneity of…

Abstract

Purpose

The purpose of this paper is to examine the effects of prestige signals measured by the reputations of the underwriter, auditor and board size on the heterogeneity of investor belief about the true value of IPO in the Malaysian IPO market.

Design/methodology/approach

This study employs a sample of 281 IPOs issued between January 2000 and December 2015. The relationship between prestige signals and investor heterogeneity, measured by first-day price range of IPOs, is analysed using cross-sectional regression and quantile regression technique.

Findings

Of the three prestige signals, the findings show that only underwriter reputation and board size have significant negative relationships with IPO first-day price range. This implies that IPOs underwritten by reputable underwriters and issuing firms with larger board members have lower heterogeneity of opinion among investors. The findings also show that underwriter and auditor reputations have negative relationship with IPO initial return, suggesting that these prestige signals help to reduce IPO under-pricing, which is a direct cost of raising capital for the issuing firm. Furthermore, the results indicate that offer price, initial return, over-subscription ratio and private placement are associated with higher first-day price range. However, the findings on offer size suggest that larger IPO offer size is associated with lower first-day price range. Overall, the findings suggest that firm’s prestige signals reduce opinion heterogeneity among investors and that lower investors’ heterogeneity leads to lower IPO under-pricing cost for issuing firms.

Originality/value

Despite the importance of underwriter, auditor and board member reputations in signalling firm’s quality and reducing the level of information asymmetry of the listing firm’s issues, research on the effects of prestige signals on investor heterogeneity remains unexplored. This study investigates the role of prestige signals in influencing investors’ heterogeneity in Malaysia. The authors conjecture that underwriter, auditor and board member with higher reputations are associated with lower levels of opinion heterogeneity among IPO investors.

Details

International Journal of Emerging Markets, vol. 15 no. 2
Type: Research Article
ISSN: 1746-8809

Keywords

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Book part
Publication date: 19 April 2011

Ari Ginsberg, Iftekhar Hasan and Christopher L. Tucci

Prior research underscores the critical role of prestigious underwriters in shaping the success of the initial public offering (IPO) process, particularly for young firms…

Abstract

Prior research underscores the critical role of prestigious underwriters in shaping the success of the initial public offering (IPO) process, particularly for young firms that do not have much of a track record. Recent scholarly work has shown that the likelihood of a start-up securing a lead prestigious underwriter is influenced by its ability to provide important signals of organizational legitimacy, as conveyed in the employment experiences of the firm's top management team. Building further on theories of organizational attention and decision making, this chapter seeks to examine whether lead prestigious underwriters also consider different types of signals of organizational legitimacy that might be suggested by the existence of ties between young firms and corporate venture capital (CVC) investors.Analysis of 1830 IPOs during 1990–1999 indicates that having a tie to CVC investor provides added legitimacy value over that provided by independent venture capital investors alone. Further analysis of 315 IPOs affiliated with CVC investors suggests that prestigious underwriters pay attention primarily to endorsement-rather than resource-related signals of legitimacy when it comes to CVC ties, and that they pay more attention to investment screening prominence than to business management prominence when it comes to endorsement legitimacy. We also found that prestigious underwriters pay more attention to signals of IPO legitimacy provided by CVC investment in IPO markets that are hot than those that are cold. Our findings provide important theoretical extensions to the study of the certification value of interorganizational affiliations and its impact on IPO success.

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Article
Publication date: 1 July 2011

Liu Jianghui

The purpose of this paper is to explore the reasons for the high‐frequency switches of lead underwriters by Chinese listed companies in their seasoned equity offerings. It…

Abstract

Purpose

The purpose of this paper is to explore the reasons for the high‐frequency switches of lead underwriters by Chinese listed companies in their seasoned equity offerings. It contributes to the literature by filling the gap and providing evidence that institutional and non‐market factors could affect listed companies' decisions to switch their lead underwriters in the Chinese capital market.

Design/methodology/approach

This paper employs a numerical measure of listed companies' loyalty to evaluate their frequency of switching lead underwriters, and employs a Logit model and an OLS model to identify the key determinants of switching lead underwriters by Chinese listed companies.

Findings

It is observed that the frequency of switching lead underwriters is very high among Chinese listed companies for their seasoned offerings. It is also found that underwriters' deficient reputation and the lack of industrial experience, together with the depreciation of relationship‐specific assets, could have important impacts on lead underwriters being frequently switched in China. Besides, the frequent switches of lead underwriters could also be attributable to the non‐market supervision and regulatory influences by Chinese authorities over the security underwriting market.

Originality/value

This paper could help further the understanding of the factors that could explain the listed companies' frequent switches of their lead underwriters for their seasoned offerings in China. In addition, this paper has policy implications on how to improve the listed companies' loyalty for regulators in China. These implications could help improve the regulatory environment and promote the overall performance of the Chinese security underwriting market.

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