The Effect of Banking Relationships on the Firm's IPO Underpricing

  • Author(s): CAROLA SCHENONE
  • Published: Nov 27, 2005
  • Pages: 2903-2958
  • DOI: 10.1111/j.1540-6261.2004.00720.x

ABSTRACT

This paper investigates the effects of pre‐IPO banking relationships on a firm's IPO. Using a new and unique data set, which compares the firm's pre‐IPO banking relationships to the underwriters managing the firm's new issue, I test whether banking relationships established before the firm's IPO ameliorate asymmetric informa tion problems behind high IPO underpricing. The results show that firms with a pre‐IPO banking relationship with a prospective underwriter face about 17% lower underpricing than firms without such banking relationships. These results are robust to controlling for the firm's endogenous selection of the pre‐IPO banking institution.

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