1990
DOI: 10.1111/j.1540-6261.1990.tb02426_1.x
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Initial Public Offerings and Underwriter Reputation

Abstract: This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of "informed" activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incent… Show more

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Cited by 339 publications
(624 citation statements)
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“…An indicator variable coded one if the acquirer engaged a top investment banking firm to provide a fairness opinion, and zero otherwise. Top investment bankers are classified following the Carter and Manaster (1990) ranking system Goodwill…”
Section: Appendixmentioning
confidence: 99%
“…An indicator variable coded one if the acquirer engaged a top investment banking firm to provide a fairness opinion, and zero otherwise. Top investment bankers are classified following the Carter and Manaster (1990) ranking system Goodwill…”
Section: Appendixmentioning
confidence: 99%
“…The idea that banks or auditors certify the quality of borrowing or issuing firms has been theoretically examined by Booth and Smith (), Titman and Trueman (), Carter and Manaster (), Chemmanur and Fulghieri (), Tirole (, pp. 249–251), among others.…”
Section: Introductionmentioning
confidence: 99%
“…Specifically, in the papers by Titman and Trueman () and Chemmanur and Fulghieri (), certification is done with the certifier reporting its finding of the firm's quality truthfully by assumption . In the papers by Booth and Smith () and Carter and Manaster (), firms’ quality is signaled by the reputation of the matched certifier—namely the underwriter—and this reputation is observed by the uninformed investors. Lastly, Tirole () assumes that a borrower can buy at a certain cost a signal (namely, certification) “that perfectly reveals the borrower's type”.…”
Section: Introductionmentioning
confidence: 99%
“…We use this criterion to separate high-ranked investment bankers from the low-ranked ones. The traditional view is that prestigious underwriters use their reputation capital to certify the value of the firm and reduce investor's uncertainty about the value of the issue, and that consequently lowers the level of underpricing in IPOs (see Smith (1986), Booth and Smith (1986), Beatty and Ritter (1986), Carter and Manaster (1990), and Chemmanur and Fulghieri (1994), among others).…”
Section: Empirical Analysismentioning
confidence: 99%
“…We follow the ranking described in Appendix 3 of Loughran and Ritter (2004) to derive the measure of underwriter's rank. They started their rankings with rankings from Carter and Manaster (1990) and Carter, Dark, and Singh (1998), and created rankings for 1992-2000 using the same methodology. The resulting rankings are on a scale of 0 to 9, with a higher number denotes a higher ranking.…”
Section: Empirical Analysismentioning
confidence: 99%