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Underwriter Spread, Underwriter Reputation, and IPO Underpricing: A Simultaneous Equation Analysis
Author(s) -
Chen Carl R.,
Mohan Nancy J.
Publication year - 2002
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00441
Subject(s) - underwriting , initial public offering , reputation , business , market segmentation , monetary economics , accounting , finance , economics , marketing , social science , sociology
This paper studies the relationships between underwriter reputation, underwriter spread, and IPO underpricing. We consider the information content of underwriter spread and find that it conveys information pertinent to IPO quality. Because underwriter spread is endogenous, underpricing and underwriter spread are jointly determined in a simultaneous equation system. Also, we examine the IPO market for evidence of segmentation, and our results suggest some market segmentation. Underwriter spread impacts initial underpricing for a group of medium‐reputation underwriters, while underpricing affects underwriter spread for groups of low‐ and high‐reputation underwriters. Consequently, high‐risk IPOs may not be priced the same way as low‐risk IPOs. We attribute this finding to regulation, competition, and/or market segmentation.