Abstract
This paper examines the determinant of an initial public offering (IPO) underwriting mandate in Japan. As a determinant, I focus on affiliation ties, which are the relationships between issuers’ board members and the underwriters with which these members have worked. Using board members’ biographical information, I find that the presence of board members who have worked at a specific bank or its parent company increases the probability of choosing the bank as the lead underwriter. This effect is economically larger than that of lending relationships and remains even if the issuer has no lending and shareholding relationships with the underwriter. In addition, the effect is more pronounced when firms with small issues choose high-reputation underwriters, suggesting that affiliation ties can help firms with small issues, which would usually not be accepted by reputable underwriters, to be underwritten by reputable underwriters. I find little evidence that affiliation ties affect IPO outcomes, as measured by price revisions and underwriting fees.
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Notes
For instance, Cooney et al. (2015) used the measure of interpersonal relationships—the link between the executive or director of issuers and book managers in terms of school connections, past jobs, and board membership connections.
I thank the editor and the referees for suggesting that I expand the scope of this paper.
Meoli et al. (2013) found that IPO firms that have the affiliation with a university are valued more than IPOs without a university affiliation.
Bharath et al. (2007) report that the top five underwriters in the USA dominated 61.4% of the equity underwriting markets between 1986 and 2001.
Some practical IPO handbooks also document that in the USA, the lead underwriter is typically selected 6 to 12 months before the IPO.
I use IPOs listed in JASDAQ, Mothers, Hercules, Centrex, Ambitious, Q-Board, and NEO. I exclude IPOs listed in the first or second section of the Tokyo Stock Exchange (TSE) because they tend to be larger in their offerings and firm sizes, for which underwriter selection will not be influenced by the firm’s decision.
To identify affiliation ties, IPO prospectuses are a reliable information source compared with commercial databases in Japan, such as Toyo Keizai Shimpo Sha. While the databases record only one work experience, IPO prospectuses report a series of work experiences for each board member, which enables us to identify the affiliation ties more precisely. For instance, I assume that a firm has a board member X who has worked for banks B1 and B2. In this case, member X has two affiliation ties between banks B1 and B2, respectively. However, if we consider only one work experience, we accordingly ignore the affiliation tie either between X and B1 or between X and B2.
I consolidate a small proportion of industries that have a share of less than 5% with “other” industries. As a result, five industry (service, IT/communications, retail, real estate, and wholesale) dummies are included. The industry class “others” is used as the base category in the estimation.
Grunert and Norden (2012) examined whether and how hard and soft information affects a borrower’s bargaining power vis-à-vis its bank and found that more favorable soft information increases the borrower’s bargaining power.
The results are similar when the reputable underwriters are defined as the top three underwriters.
Krigman et al. (2001) found that the offer size strongly explains the difference in the fees, and underwriters charge higher fees for small offerings due to economies of scale in underwriting.
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Acknowledgements
I am grateful to Hirofumi Uchida for his support and comments. I am also greatly indebted to the editors (Joern Block and Silvio Vismara) and anonymous referees whose comments helped significantly improve the paper. This work was supported by JSPS KAKENHI Grant No. JP16K17167. All errors are my own.
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Appendices
Appendix 1
Appendix 2
Appendix 3
1.1 Examples of affiliation ties
1.1.1 Example 1 (single tie)
Mr. X, a general manager of Firm A, had worked with Bank B for more than 30 years until he joined Firm A in 1997. Mr. X has served as general manager of the Internal Auditing Department since January 2001 and has been a director since September 2001. In 2006, Firm A went public with the lead underwriter of Bank B’s subsidiary securities company. Other board members of Firm A, except Mr. X, do not have work experience with the underwriters listed in Appendix 1 and their parent banks.
1.1.2 Example 2 (mixed ties)
Mr. Y, a director at Firm C, had worked with Bank D for 10 years. Mr. Z, a director at Firm C, has worked with Securities Company E for 14 years. Firm C went public with the lead underwriter of Securities Company E, who is a reputable underwriter.
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Takahashi, H. Affiliation ties and underwriter selection. Small Bus Econ 50, 325–338 (2018). https://doi.org/10.1007/s11187-016-9832-8
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DOI: https://doi.org/10.1007/s11187-016-9832-8