Heterogeneous Beliefs, IPO valuation and the economic role of the Underwriter In IPOs
Thomas J. Chemmanur and Karthik
Krishnan
Financial Management
Vol. 41, No. 4 (WINTER 2012), pp.
769-811
Abstract
We empirically analyze the economic role of the
underwriter in initial public offerings (IPOs), distinguishing between the
"certification" and "market power" hypotheses. We find that
equity in high-reputation underwriter backed IPOs is priced higher and further
away from intrinsic value than that in low-reputation underwriter backed IPOs.
Our results are robust to controlling for the endogenous selection of firms to
take public by underwriters. Overall, our results support the market power
hypothesis and reject the certification hypothesis, indicating that the role of
underwriters is to obtain the highest possible valuation for the IPOs that they
back rather than to price the equity close to intrinsic value.
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