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Do prestigious underwriters shape IPO pricing? A meta-analytic review

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Abstract

This paper investigates the controversial effect of underwriter reputation on underpricing by applying a meta-analysis methodology. The aim is to verify whether and to what extent the magnitude of this relationship is conditioned by institutional-specific moderators. Companies that go public with the support of prestigious underwriters report a changing effect on underpricing. The relation between underwriter reputation and underpricing was negative in the seventies, while it shifted to be positive in the nineties and two thousands. The positive effect between underwriter reputation and underpricing is higher in common law countries compared to civil law countries. In particular, there was a strong positive effect in the USA starting in the two thousands. This paper also provides a methodological contribution by the application, for the first time in management topic, of the robust variance estimation method to address the issue of within-paper heterogeneity.

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Notes

  1. In addition to the standard measure of underpricing, as suggested by Ritter (1984), it can be calculated as the difference between the “simple” underpricing above and the market index return measured between the day of the admission to the trading and the beginning of the public offering (Rock 1986; McGuinness 1992; Carter et al. 1998; Ljungqvist 1999; Certo et al. 2001a, b; Loughran and Ritter 2004; Chahine and Filatotchev 2008a, b).

  2. Brau et al. (2004) support this view by submitting a questionnaire about the decision to go public to 336 chief financial officers (CFOs) of non-financial U.S. companies. The questionnaire asked about positive and negative signals to investors in the context of an IPO. Ninety-one percent of the respondents indicated that profitability is the most positive signal to investors and it consolidates a company’s reputation even more than continuous positive operating results, because investors view past successes as indicating future profits. The second-most-popular opinion of the respondents was that the quality of an investment is further guaranteed by a partnership with a major investment bank (74% of CFOs), and the third-most popular indicator of quality was a venture capitalist’s ownership of an equity stake in a company (40%). According to the majority of the respondents, signals perceived by outsiders to be very negative include the sale of a large part of the capital or the sale of a significant proportion of shares by internal shareholders. The willingness of insiders to quit the company en masse will surely cause investors to believe that the organisation has financial problems.

  3. “… when an underwriter is faced with an IPO that exhibits an unusually high demand among investors, s/he adjusts the offer price to a point above the high end of the initial filing range but significantly below the anticipated market price for the IPO shares. Therefore, investors that disclose their high reservation prices for these high-demand IPOs not only receive a larger allocation of IPO shares but also a higher than normal initial return …” (Cooney et al. 2001: 17).

  4. The term “study” refers to a single regression inside a paper. To deal with the fact that in each paper there can be many regressions (studies) that are not independent correlations, the robumeta approach will be used.

  5. I also checked that the results were not affected by posing away observations that were more than 3.0 standard deviation far from the mean effect size, instead of the winsorizing approach.

  6. The diversity among the studies that included a meta-analysis necessarily leads to statistical heterogeneity.

  7. Doidge et al. (2004) show that for a given level of legal protection for investors, the incentive to adopt better governance mechanisms depends on a country’s financial development.

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  1. Department of Economics, University of Messina, Via dei Verdi, 75, 98122, Messina, Italy

    Tiziana La Rocca

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Appendix

Appendix

List of the management, entrepreneurship and finance journals used for manually search of papers, which were the journals that I found in the first set of papers that I obtained as output using the first research-criteria.

List of the Journals

 

Academy of Management Journal; Academy of Management Review; Applied Financial Economics; British Journal of Management; Corporate Governance: An International Review; Entrepreneurship Theory and Practice; European Economic Review; European Journal of Finance; Financial Management; Financial Markets; Financial Markets, Institutions & Instruments; Financial Review; Global Finance Journal; Investment Management and Financial Innovations; Journal of Accounting Research; Journal of Applied Business Research; Journal of Banking and Finance; Journal of Business; Journal of Business Venturing; Journal of Business, Finance and Accounting; Journal of Corporate Finance; Journal of Economics and Business; Journal of Economics and Finance; Journal of Economic Perspectives; Journal of Finance; Journal of Financial and Quantitative Analysis; Journal of Financial Decision Making; Journal of Financial Economics; Journal of Financial Markets; Journal of Financial Services Research; Journal of International Financial Market, Institution & Money; Journal of Law and Economics; Journal of Management Studies; Journal of Multinational Financial Management; Journal of Property Research; Journal of Property Investment & Finance; Journal of Small Business Management; Pacific-Basin Finance Journal; Park Place Economist; Quarterly Journal of Business and Economics; Quarterly Review of Economics and Finance; Review of Financial Studies; Review of Managerial Science; Review of Quantitative Finance and Accounting; Small Business Economics; Strategic Management Journal; Strategic Organization.

 

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La Rocca, T. Do prestigious underwriters shape IPO pricing? A meta-analytic review. Rev Manag Sci 15, 573–609 (2021). https://doi.org/10.1007/s11846-019-00356-1

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