Market shares in IPOs
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.
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.
Lager banks Small banks Specialization Business size limited Attract first customers No specialization More potential clients, less risk Difficult to attract first customers
Good long-run performance has a positive effect on market shares 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 bank’s analysts have a positive effect on market shares changes
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