The Information Advantage of Underwriters in IPOs
Yao-Min Chiang, Michelle Lowry, Yiming Qian
Management Science · 2019 · Volume 65 · Issue 12
Abstract
Using a unique data set of dealer-level trading data in bookbuilding initial public offerings (IPOs), we find strong evidence that lead underwriter trades in IPO firms are significantly related to subsequent IPO abnormal returns. This relation is concentrated among issues in which underwriters’ information advantage is likely greater, specifically among IPOs with higher information asymmetry or subject to higher investor sentiment and among underwriters with the most industry experience. In contrast, we find no similar relation for trades by other syndicate members, who are not involved in due diligence or pricing, or around auction IPOs, which are characterized by less underwriter involvement. Our results are consistent with the joint hypothesis that underwriters of bookbuilding IPOs gain unique insight into the values of these client firms and that they trade on this information advantage. This paper was accepted by Gustavo Manso, finance.
Keywords
IPO, underwriter, auction, conflicts of interest, information asymmetry
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