Volume 21, Number 3; Article by Seshdev Sahoo, Prabina Rajib; September, 2009
Seshadev Sahoo is a Research Scholar at the Vinod Gupta School of Management (VGSOM), Indian Institute of Technology, Kharagpur, and Associate Professor, Institute of Management and Information Science (IMIS), Bhubaneswar,(Orissa).
Prabina Rajib is Associate Professor (Finance),Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur.
This paper attempts to quantify the prestige rank for investment banks that manage initial public offering IPO issues, and evaluates the relationship between investment bank ranking and IPO underprice. The study-based paper also explores cross sectional comparability of investment bank prestige with other issue specific signaling variables post issue promoter holding, syndicate size, and the age of the firm. The study is based on Indian IPOs issued during the period 2001 to 2005 and documents that IPOs were significantly underpriced (at 46.63%) during the period of study.
The study came up with an inverse relationship between investment bank prestige and underprice, suggesting that the magnitude of underprice is less for issues managed by prestigious investment banks compared to issues associated with their less prestigious counterparts. The lower the prestige rank, the greater is the magnitude of underprice. However within a group, the study found no difference in underprice when only the top two investment banks were considered, thus indicating that the top two investment banks in the syndicate overshadow the involvement of the other members in the syndicate.
The paper documents that most prestigious banks manage issues with bigger offer sizes. Applying the OLS regression model, it establishes size of the syndicate as the leading factor in estimating the prestige value of investment banks. Further, there is a positive association between age of the IPO firm and prestige rank of IPOs indicating that the higher the maturity of the firm, the more likely the issue will be managed by prestigious investment banks. A positive relationship between investment bank prestige and post issue promoter groups holding also emerged.
Reprint No 09302