What order flow reveals about the role of the underwriter in IPO aftermarkets
Frederick H. deB. Harris
Thomas H. McInish
Purpose – The purpose of this paper is to investigate the cross-sectional determinants of the role of the underwriter in aftermarket price discovery. Design/methodology/approach – The paper estimates Gonzalo-Granger common factor weights across underwriter and non-underwriter execution channels in the IPO aftermarket and investigates the cross-sectional determinants of these CFWs. Findings – The first novel result is that verifiable facts are not a substitute for, but a complement to, underwriter certification and advice. Specifically, the underwriter's contribution to price discovery increases with the number of supplier and customer contracts reported in the prospectus. Second, the underwriter's role in price discovery declines when the IPO is first in a new technology or product space. These findings indicate that the verification process, not de novo information production, is the key function of the underwriter. Research limitations/implications – Research design is applicable to IPOs in the USA and elsewhere. Originality/value – Previous research examining IPO aftermarket trading has been largely limited to the first day of trading. The paper contributes to the small but growing literature that examines the role of the underwriter beyond this period.
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