Can Underwriters Reputation affect your share performance?

Why is that happening?

First of all, the underwriter is usually an investment bank that employs IPO specialists. These bankers ensure that the firm satisfies all regulatory requirements, such as filing with the appropriate bodies and depositing all fees, and makes all mandatory financial data available to the public.

Next, and perhaps most importantly, the underwriter contacts large prospective buyers of stock, such as mutual funds and insurance companies who have large sums of money to invest. The underwriter takes the pulse of prospective buyers and then recommends an IPO price to the firm. This is the most common way to set the price at which the shares will be sold. Althought there and other ways pricing shares. An excessive price may leave the firm with unsold stock, while a price that is too low will mean forgone revenue from the stock sale. In that point starting the underpricing phenomenon. Theories that can explain that phenomenon are the information assymetry, information symmetry and aslo the allocation of shares theory.

It is historically proved that a reputable Underwriter (Moodys, Goldman Sachs, JPMorgan, Merrill Lynch, UBS) can set a better investement and prospective position your IPO-share than a less reputable investement bank-Underwitter in long run.

In spite of that, Shares with unreputable Underwriters are having better first-day and 1-year performance than the shares with reputable Underwriters. It is a strange phenomenon that lot of academics have mention it in their researches.

As for the firms with reputable Underwriters, they are seems to have better long-run performance, for a 2-year, 3-year holdning period.

In conlcusion, we observe that Underwriters reputation can affect your share performance depending on their reputation and ranking on the global position. For more factors that can infuence the performance of an IPO click here.

CG