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Essays on reputation and IPO underwriting

Author: Gueorgieva, Sofia INSEAD Area: FinancePublisher: Fontainebleau : INSEAD, 2006.Language: EnglishDescription: 107 p. : Graphs ; 30 cm.Type of document: INSEAD ThesisThesis Note: For the degree of Ph.D. in management, INSEAD, August 2006Bibliography/Index: Includes bibliographical referencesAbstract: The dissertation is composed of three essays. The first essay, "IPO Fee Competition with Sequential Screening", presents a static model of price competition between investment banks for IPO underwriting where the underwriters imperfectly evaluate both good and bad firms. They differ in their evaluation accuracy. The IPO candidate applies at banks sequentially and the evaluation applications are observable. With simultaneous fee bidding the banks announce two-tier fees. The monopolistic position of the second screener leads to very high equilibrium fees, although the banks compete for the first screening. The underwriter reputed to be more accurate charges higher effective fees in equilibrium than its rival and is the first to be approached by the IPO candidate. The second essay, "Investment Banks Investing in Reputation" is a dynamic extension of the first. This work studies the creation, maintenance and use of reputation by an entering bank in a previously monopolistic IPO underwriting market. The entrant has a certain reputation of being very accurate at no cost. It may also need to incur cost to improve its screening accuracy. At the end of the first period it is updated using information about the entrant's performance obtained by comparing the true value of the IPO firm to the bank's evaluation. I identify the conditions under which a mediocre entrant will choose to exert effort to improve its screening accuracy and invest in reputation. In the third essay, "Underwriter Reputation and Changes in the Syndicate Composition: Effect on IPO Pricing," I empirically test if changes in IPO syndicate membership send a negative signal about the issuer as predicted by the first essay. There is a significant relation between the removal of lead underwriters and downward file and offer price revisions, also lower underpricing. The reputation of the final lead manager appears to have a significant mitigating effect on this relationship. Lead management reputation is positively related to underpricing during the bubble years of 1999 and 2000, and negatively in the periods before and after. List(s) this item appears in: Ph.D. Thesis
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For the degree of Ph.D. in management, INSEAD, August 2006

Includes bibliographical references

The dissertation is composed of three essays.
The first essay, "IPO Fee Competition with Sequential Screening", presents a static model of price competition between investment banks for IPO underwriting where the underwriters imperfectly evaluate both good and bad firms. They differ in their evaluation accuracy. The IPO candidate applies at banks sequentially and the evaluation applications are observable. With simultaneous fee bidding the banks announce two-tier fees. The monopolistic position of the second screener leads to very high equilibrium fees, although the banks compete for the first screening. The underwriter reputed to be more accurate charges higher effective fees in equilibrium than its rival and is the first to be approached by the IPO candidate.
The second essay, "Investment Banks Investing in Reputation" is a dynamic extension of the first. This work studies the creation, maintenance and use of reputation by an entering bank in a previously monopolistic IPO underwriting market. The entrant has a certain reputation of being very accurate at no cost. It may also need to incur cost to improve its screening accuracy. At the end of the first period it is updated using information about the entrant's performance obtained by comparing the true value of the IPO firm to the bank's evaluation. I identify the conditions under which a mediocre entrant will choose to exert effort to improve its screening accuracy and invest in reputation.
In the third essay, "Underwriter Reputation and Changes in the Syndicate Composition: Effect on IPO Pricing," I empirically test if changes in IPO syndicate membership send a negative signal about the issuer as predicted by the first essay. There is a significant relation between the removal of lead underwriters and downward file and offer price revisions, also lower underpricing. The reputation of the final lead manager appears to have a significant mitigating effect on this relationship. Lead management reputation is positively related to underpricing during the bubble years of 1999 and 2000, and negatively in the periods before and after.

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