On the Marketing of IPOs

Abstract

Derrien (2005) and Ljungqvist, Nanda, and Singh (2003) build upon the work of Miller (1977) and claim that issuers and the regular customers of investment bankers benefit from the presence of sentiment investors (noise traders) in the market for an IPO. Thus we argue that investment bankers have an incentive to promote an IPO in order to induce sentiment investors into the market for it. Consistent with this motivation and these models, we expect that the promotional efforts of investment bankers should influence the compensation of investment bankers, the valuation of an IPO, its initial returns and trading, the wealth gains of inside shareholders, and the likelihood that an issuer switches investment bankers for a subsequent seasoned equity offering. Examining data for a sample of IPOs from 1993 through 2000, we find evidence consistent with these predictions, and so with the proposition that an investment banker's ability to market an IPO to sentiment investors is important.