2004•The Journal of FinanceRequires access

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

Carola Schenone

Abstract

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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Key concepts: Initial public offering, Underwriting, Business, Accounting, Information asymmetry, Monetary economics, Finance, Economics