Investment Banks' Repeated IPO Business Opportunities and IPO Underpricing

Abstract

Recent studies suggest that the agency issues associated with investment bankers contribute to the well-documented IPO underpricing phenomenon. In this paper we argue that the potential repeated IPO business opportunities offered by the issuer mitigate the agency problems of investment bankers, inducing them to leave less money on the table. We examine offer prices, day-one closing prices and day-one returns of China company IPOs (HIPOs) and Hong Kong company IPOs (HKIPOs) offered in the Hong Kong Stock Exchange (HKSE). China company IPOs are selected and controlled by the Chinese regulatory authority, and as such the regulatory authority is the client of the investment banks. We find that compared to HKIPOs, HIPOs have (a) lower day-one returns, and (b) higher offer prices, consistent with the notion that agency problem of investment bankers is mitigated by the potential for repeat IPO businesses for HIPOs.