Underwriter Manipulation in IPOs
We provide a new explanation for the extremely high level of IPO underpricing during the Internet bubble years of the late 1990s. Our explanation is based on the manipulative practices adopted by underwriters during the IPO process. By requiring their customers to buy the stock in the aftermarket in return for IPO allocations (a tie-in agreement), the underwriters created artificial excess demand for the IPOs, leading to distorted (manipulated) price levels in the immediate after-market. First we provide a theoretical model of IPO manipulation in the presence of tie-in agreements and derive predictions on the after-market price patterns of manipulated and non-manipulated IPOs. Then, empirically, we show that IPOs with tie-in agreements exhibit a significantly different pattern for the first-day and long-term returns than the rest of the IPOs during the 1998-2000 period, consistent with the model. IPOs with tie-in agreements experience 10 times higher filing-to-offer return, 7 times higher first-day return and 15 times higher first-day trading volume. However, these stocks begin to under-perform significantly compared to non-tiein IPOs starting five months after the IPO. Lower returns persist for two years post the IPO. We find that the tie-in IPOs experience significantly higher volume and lower returns around the lock-up expiration period. Our main result is that even after controlling for hot market conditions and issuer characteristics such as issue size, underwriter quality, and whether the IPO is a technology stock, we find that manipulation explains most of the unusually high level of underpricing during the late 1990s.
Rajesh K. Aggarwal Amiyatosh K. Purnanandam Guojun Wu
University of Virginia University of Michigan
国际会议
昆明
英文
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）