IPO Information Aggregation and Underwriter Quality

Abstract

A key distinction between some models of IPO pricing (e.g., auctions and bookbuilding) and others (e.g., fixed-priced models) is whether price discovery occurs in the primary market or the secondary market. We show that higher investment bank reputation is associated with 1) more active filing price revisions and 2) reduced secondary market return variability. In fact, file price revisions of non-reputable banks show strong clustering on exactly zero dollars. Hence, reputable underwriters resolve a greater proportion of uncertainty before the issue goes public. Finally, the well-documented partial adjustment phenomenon - often attributed to information aggregation - is almost exclusively due to the behavior of reputable underwriters. Taken together, this evidence suggests that theoretical models of primary market information aggregation are better suited for reputable underwriters.

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