Market Conditions, Underwriter Reputation and IPO Underpricing

Abstract

This study develops a model that examines the relationship between the industry over/under-valuation and IPO underpricing. In this model top-tier underwriters have reputational concerns regarding the long run performance of the issue and therefore adjust the initial offer price to the “historical” pricing. The model shows that IPO underpricing is partially due to the relative industry valuation. There is strong support that valuation effect differentially impacts issues by top and lower tier underwriters. This further supports the hypothesis that reputational concerns are only important to top-tier underwriters. Lower-tier underwriters price issues to maximize cash flow.

Keywords: IPO, Underpricing, Underwriter Reputation

JEL Classification: G24, G10