2004•SSRN Electronic JournalOpen access

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

Carola Schenone

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 information problems behind high IPO underpricing. The results show that firms with a pre-IPO banking relationship with a prospective underwriter face about 17 percent 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, Information asymmetry, Monetary economics, Accounting, Financial system, Finance