Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks

TLDR: In this paper, the relationship between the short-term and long-term returns of initial public offerings (IPOs) and the reputation of the underwriters associated with the IPOs is explored.

Abstract: Explores the relationship between the short-term and long-term returns of initial public offerings (IPOs) and the reputation of the underwriters associated with the IPOs. Previous work in this area has shown that use of reputable underwriters for the IPO leads to less short-run underpricing. Data used in this analysis were collected from 2,292 IPOs that were issued between January 1979 and December 1991. The sample includes only firm commitment, domestic offerings of at least $2 million. Three ways of measuring underwriter reputation are considered: the measure developed by Johnson and Miller, the Megginson-Weiss measure, and the Carter-Manaster measure. Results show that larger and more established firms are marketed by the most prestigious investment banks for the initial IPO. In both short-term and long-term performance, the Carter-Manaster measure has the most significance. Further, the analysis shows less negative performance over the three-year period considered for IPOs that are underwritten by more prestigious investment banks. Although it is costly to compile the Carter-Manaster measure, it is shown to be the best of the three measures at controlling for underwriter prestige in IPO studies. Included in this work are the Carter-Manaster measures and the corresponding Megginson-Weiss measures for a large number of investment banks. (SRD)