Local Underwriter Oligopolies and IPO Underpricing
52 Pages Posted: 27 Nov 2009 Last revised: 4 Mar 2011
Date Written: February 28, 2011
Abstract
We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.
Keywords: IPOs, Underwriters, Oligopoly, Venture Capital, Analysts
JEL Classification: G24
Suggested Citation: Suggested Citation
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