IPO Cycles, Firm Characteristics, and the Role of Underwriters

Abstract

We document significant variation in the quality of firms going public within an IPO wave. In the early stages of an IPO wave, when initial returns and IPO demand are high, the average quality of IPO stock is low. Later in the IPO wave, when initial returns and IPO demand are low, firms going public have better operating performance, higher market share and higher long-term abnormal stock returns. Despite the poorer long-term performance of early movers, analysts affiliated with the underwriters provide disproportionately more positive recommendations to early movers than to late movers. The bias of affiliated analysts suggests that underwriters are less selective about the firms they take public when the market for IPOs is strong. Institutional investors are not fooled by affiliated analysts and appear savvy to the performance patterns of early and late-mover IPOs. Specifically, institutional investors take advantage of the short-term high returns offered by early IPOs but, in the longer term, exit out of the early-mover IPOs in favor of late-mover IPOs.