Why are IPO investors net buyers through lead underwriters?

In Nasdaq initial public offerings (IPOs) issued between 1997 and 2002, purchases of lead underwriter clients exceed sales by an amount equal to 8.79% of the total issue. We find that lead underwriter clients do not buy to build larger long-term positions, capitalize on superior execution quality, o...

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Bibliographic Details
Published in:Journal of financial economics 2007-08, Vol.85 (2), p.518-551
Main Authors: Griffin, John M., Harris, Jeffrey H., Topaloglu, Selim
Format: Article
Language:English
Subjects:
Financial risks
Information economics
Initial public offering
Initial public offerings
Investment banks
Investors
IPO
Laddering
Lead underwriter
NASDAQ trading
Ownership and control
Risk management
Stockbrokers
Studies
Syndicate
Underwriting
Venture capital
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Summary:In Nasdaq initial public offerings (IPOs) issued between 1997 and 2002, purchases of lead underwriter clients exceed sales by an amount equal to 8.79% of the total issue. We find that lead underwriter clients do not buy to build larger long-term positions, capitalize on superior execution quality, or because of clientele effects. However, characteristics of net buying that are at odds with these explanations and other behaviors (like institutional purchases of cold IPOs) are all consistent with lead underwriters engaging in quid pro quo arrangements with clients. Price contribution analysis shows that such client buying activity contributes significantly to first-day price increases.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2005.12.005