Underwriter reputation and underpricing: evidence from the Australian IPO market

Abstract

Dimovski and Brooks (J Intern Financ Mark Inst Money 14:267-280, 2004b) examined 358 Australian industrial and mining company initial public offerings (IPOs) from 1994 to 1999 to report that more money was left on the table by IPOs that engaged underwriters than those that did not engage underwriters. Loughran and Ritter (Autumn 5-37, 2004) suggested that the negative relation between underwriter reputation and underpricing has reversed in the 1990s with U.S. IPOs. The main purpose of this paper is to study the relationship between underwriter reputation and underpricing in terms of Australian IPO data. In this paper, we use 380 Australian industrial company IPOs from 1994 to 2004 to perform the empirical study. Our results suggest that more prestigious underwriters are associated with a higher level of underpricing. Other variables that are found to be significant in explaining the level of IPO underpricing are market sentiment, share options, total capital raised and underwriter options.

Management earnings forecasts and IPO performance: evidence of a regime change

“…Baron (1982) and Dimovski et al (2011) argue that asymmetric information exists between the well-informed underwriters and the less-informed issuers; therefore, underwriters are able to price new issues below the market equilibrium to reduce the probability that they will absorb losses due to unsold shares. Chen and Firth (1999) report a positive relation between underwriter reputation and accuracy of earnings forecasts.…”

Information production within the venture capital market: Implications for economic growth and development

“…Studies which provide evidence that VC backed IPOs have higher initial returns in relation to non-VC backed IPOs include Lee and Wahal (2004). Studies that provide mixed evidence on relations between underwriter reputation and initial returns to IPOs include Loughran and Ritter (2004), (2004), Dimovski, Philavanh, and Brooks (2011), and Chemmanur and Fulghieri (1994). In light of these …ndings and theoretical predictions in Proposition 3, ‡ips in relations between initial returns to VC or non-VC backed IPOs in Table IV are consistent with outcomes of information production.…”

“…Studies such as Loughran and Ritter (2004), Kirkulak andDavis (2004), Fernando, Gatchev, andSpindt (2005), Dimovski, Philavanh, and Brooks (2011), Chemmanur and Fulghieri (1994) or Megginson and Weiss (1991) show, conditional on di¤erences in market reputation that are derived from information production, that either of 1 t < 2 t or 1 t > 2 t is feasible within the same general risk class . None of the studies examine, however, transitions in or that occur in response to information production by reputable intermediaries.…”

“…In light of evidence that higher reputation …nancial intermediaries can at di¤erent points in time be associated with …rms characterized by either of lower or higher severity of information asymmetry (see for example, Loughran and Ritter, 2004;Kirkulak and Davis, 2004;and Dimovski et al, 2011), more reputable …nancial intermediaries in 1 does not necessarily imply 1 t < 2 t . Suppose 1 t > 2 t .…”

“…Studies such as Loughran and Ritter (2004), Kirkulak and Davis (2004), Dimovski, Philavanh, and Brooks (2011), Chemmanur and Fulghieri (1994), and Megginson and Weiss (1991) provide mixed evidence on relations between initial returns to IPOs and market reputation. In this study, the formal theory I develop for the assessment of interactions between market reputation and initial returns to IPOs predicts market reputation can be associated with relatively higher initial returns to IPOs whenever the arrival of new innovative projects induces reputable intermediaries to bring their superior information production skills to bear on the pricing of new innovations.…”