Market shares in IPOs

1
Market shares in IPOs
2
What determines market shares?

• Several hypothesis
• First-day return
• - Underpricing imposes costs on the issuers by
  leaving money on the table.
• - Overpricing is also not beneficial for the IB.
  Their role is to
• certify the value of the shares for investors.
  If there is overpricing, investors will be
  reluctant to buy shares underwritten by this
  investment bank.
• Underwriting spread
• - Issuers may choose lower fee underwriters.
• - On the other hand, reputable banks may charge
  higher fees.
• Reputation is volatile and high fees signal
  that the bank does not fear
• losing its reputation.

3

• Long-run performance
• Investors will be reluctant to buy shares from
  IB offering shares of companies with no positive
  prospects.
• Analyst reputation
• - High level analyst coverage is central for the
  success of an IPO.
• - The presence of a top analysts certifies the
  IPO value to investors.
• Industry specialization
• - Experience is central for evaluating
  companies, and specialization
• can increase the precision of pricing due to
  information spillovers from other equity
  issuances.
• - For well established IB, however,
  specialization reduces the amount of business
  that can be acquired.

4
Lager banks Small banks
Specialization Business size limited Attract first customers
No specialization More potential clients, less risk Difficult to attract first customers
5

• Findings
• First-day return
• Initial overpricing has a negative effect on
  market shares
• Very positive first-day returns also have a
  negative effect on market shares
• A reasonable level of underpricing seems optimal
• Good long-run performance has a positive effect
  on market shares
• Lower fees increase market shares
• Industry specialization has a negative impact on
  market shares for established banks. It has a
  positive impact on market shares for smaller
  banks
• For reputable banks, improvements to the
  reputation of the banks analysts have a positive
  effect on market shares changes

6
A note on privatizations

• Privatizations constitute a particular class of
  IPOs, where the
• vendor is not an entrepreneur but the government.
• Particularity of privatizations Governments have
  been very
• innovative in their approach to IPO, and most of
  the largest IPOs
• ever are privatizations.
• Government were among the first to
• Include foreign IB in IPO syndicates
• Use book-building techniques for pricing and
  allocation
• Introduce multi-tranche IPOs with block of shares
  reserved for particular groups of investors
• Limit the downside risk faced by investors
• Negotiate down the fees paid to the IB