Initial Public Offerings and Underwriter Reputation

Initial Public Offerings and Underwriter Reputation

  • RICHARD CARTER
  • STEVEN MANASTER

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1990.tb02426.x

Abstract


This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.

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