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Underwriter Reputation and Initial Public Offers: The Detrimental Effects of Flippers
Author(s) -
Carter Richard B.,
Dark Frederick H.
Publication year - 1993
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1993.tb01349.x
Subject(s) - reputation , underwriting , prestige , investment banking , initial public offering , business , dominance (genetics) , monetary economics , market power , investment (military) , proxy (statistics) , economics , finance , market economy , monopoly , social science , linguistics , philosophy , biochemistry , chemistry , sociology , politics , political science , law , gene , machine learning , computer science
In this research, we examine the relationship between the reputation of investment banks and the investor clientele to whom they market initial public offers. We hypothesize that the most reputable investment banks have considerable distribution power but confine initial public offer sales to investors with long‐term horizons in an effort to maintain prestige. Using the level of relative after‐market trading volume to proxy for investor type, we find that as underwriter reputation increases investors with short‐term trading horizons (“flippers”) tend to dominate the offerings over the lower prestige levels. For underwriters in the upper reputation tier, however, this dominance begins to decline with increasing reputation. In addition, we find a negative relation between the after‐market price performance of the initial public offer firm and the first week's trading volume. The results suggest that flippers can be detrimental to the performance of initial public offer firms. While distributing power may be essential for the maintenance of the reputation of investment banks, the type of investor clientele also appears to be of major importance.