Syndicate Size Research Articles

Underwriting syndicate structure and foreign IPO underpricing: A team production perspective

Grounded in team production and agency theory, we investigate investment bank opportunism in the context of 466 foreign initial public offerings (IPOs) in U.S. equity markets from 2009 to 2023. Findings reveal that IPO underpricing is higher for foreign firms underwritten by larger and more diverse syndicates owing to concerns about free-riding and moral hazard. Our results are robust to a series of sensitivity tests. Moreover, frequent foreign IPOs by home-country firms and strong home-country legal protection for investors attenuate the positive relationship between underwriting syndicate size and diversity and IPO underpricing. By delineating the collaborative nature of IPO underwriting, this study offers new insights into the implications of syndicate structure for foreign IPO performance.

Does syndicate structure create value for initial public offerings? An empirical investigation for the Indian market

PurposeThis paper aims to investigate the impact of the underwriters’ syndicate size (SS) and its structure on underpricing (UP), oversubscription rate, liquidity and volatility. The authors use a database of 185 initial public offers (IPOs) issued in India during the period 2012–2019.Design/methodology/approachThe authors have used ordinary least squares regression and stepwise regression on cross-sectional data to construct the regression model for the dependent variables under consideration, namely, UP, subscription rate (SUB), listing day volatility and listing day liquidity.FindingsThe authors find that larger syndicates reduce UP. The authors also find strong evidence of a larger subscription rate for IPOs managed by larger syndicates, suggesting that larger syndicates generate more information in the market. Looking into the composition of investment banks in the syndicate, the authors find that syndicates comprising more lead managers and comanagers attract a higher subscription from potential investors. More book running lead managers and nonmanaging syndicate members help increase liquidity and reduce the volatility of IPO stocks on listing day. Additionally, the authors find that larger firms with reputed lead managers establish larger syndicates while venture-affiliated IPO firms prefer a smaller syndicate.Practical implicationsThe findings would interest issuing firms, investors, intermediaries and policymakers engaged in formulating syndicates for better management of IPOs.Originality/valueThe study extends the present literature on IPO syndicates, particularly in the Indian context as an emerging economy. The study extended the present understanding of SS and composition, creating value for the issuers.

Syndicated green lending and lead bank performance

AbstractThis study investigates the effect of the green lending propensity of banks on profitability and risk. Using a sample of 217 green facilities financing syndication worldwide, we create a variable of green lending approach measuring the weight of green loans on total credit exposure of the lead bank and investigate the effect of the green propensity so as the structure of syndication on bank accounting performance. We find two relevant findings. First, a higher propensity to green lending is associated with lower profitability, more moderate default risk, and lower credit risk than banks with a less green investment approach. Second, more collateralization and duration of green lending increase bank performance, while the larger syndicate size reduces profitability and risk. Overall, our study suggests that banks are prone to invest in green projects, but the risks may offset profitability requiring public support to empower the role of the banking sector in boosting ecological transition.

The influence of venture capital syndicate size on venture performance

ABSTRACT Venture capital (VC) syndicates pool diverse resources from their members to accomplish the common goal of nurturing new ventures for a successful exit. Although the size of syndicate is a fundamental attribute impacting performance, the influence of syndicate size is less understood in prior studies with mixed findings. To address the gap, we suggest that there is an inverted U relationship between a syndicate size and venture performance. As the number of partners in a VC syndicate increases, a syndicate can provide more heterogeneous resources that can help its portfolio company succeed, but coordination costs increase as well. We thus predict that the net effect combining these two countervailing effects yields an inverse-U relationship between syndicate size and performance. We further examine two boundary conditions under which the nonlinear relationship is likely to manifest. Analyzing 407 investment syndicates formed by 1,106 VC firms for new ventures in the U.S. information and communications technology sector between 1990 and 2006, we find that the relationship between syndicate size and performance is an inverse-U shape. We further find that geographic distance among syndicate partners flattens the inverse-U curve, whereas a strong reputation of the lead VC firms shifts the inverse-U curve to the right.

The Achilles Heel of Reputable VCs

This paper examines the impact of competition on the investment behavior and outcomes of venture capital (VC) firms with differing reputations. Following the introduction of investor tax credit programs that increase competition, reputable VCs decrease the number and size of their investments. The results are more pronounced in states with lower investment requirements and lower VC supply. Reputable VCs also reduce their syndicate size and shrink the time between financing rounds. They become less likely to partner with serial founders and their performance deteriorates. Our results suggest that increasing competition depresses returns for reputable VCs, hurting their incentive to invest.

Ownership dispersion across large shareholders and loan-syndicate structure

This study tests the relationship between ownership dispersion across large shareholders and the structure of loan syndicates. The results of an analysis of a set of bank loan contracts that were extended to Indonesian listed firms, from 1992 to 2016, show that an uneven ownership distribution between the largest controlling shareholder and multiple large shareholders is associated with a smaller and more concentrated syndicate. In line with the agency and moral hazard theoretical framework, the results suggest that in a weak legal system, when banks are lending to companies that are at a high risk of expropriation, they decrease the syndicate size and increase the syndicate concentration in order to intensify their efforts in due diligence and monitoring.

Stage financing and syndication in the IPO underpricing of venture-backed firms: Venture capital and IPO underpricing

The article investigates the impact of stage financing and syndication practices on the underpricing level of venture-backed firms (VBFs) undertaking their initial public offerings (IPOs). This empirical study uses a unique hand-collected data set concerning more than 260 VBFs that went public on Euronext Paris and Alternext between 1997 and 2013. Our findings suggest a lower level of underpricing for firms backed by syndicated venture capital investment. Additionally, we find that the syndicate size is negatively associated with the level of underpricing. However, there is no evidence that stage financing has a significant impact. Syndication thus appears to be the only relevant mechanism to improve IPO performance (measured by the underpricing level), as it reduces agency costs and information asymmetry between the different stakeholders in an IPO process.

Size and diversity in VC syndicates and their impact on IPO performance

ABSTRACTThis paper investigates the impact of venture capital (VC) syndicate size and composition on the IPO and post-IPO performances of investee companies in an attempt to shed some light on the extent to which larger and more diverse syndicates are more likely to suffer from internal agency problems which might hinder the decision-making process and lead to less value added for their portfolio companies. The question is of great relevance because, while the vast majority of the empirical literature compares VC backed IPOs with non-VC backed ones, most VC funding is provided by syndicates of two or more financiers. We construct alternative measures of size as well as diversity based on several VC characteristics such as age, geographic location, type and affiliation of VC firms and find that larger and more diverse syndicates are associated with higher underpricing and lower valuation at the IPO date. Furthermore, we provide evidence that that diversity and size are negatively correlated to the long-term performance of the IPO firms and this finding is robust to several alternative measures of long-term performance.

Market Reputation, Innovation or Synergistic Partnerships, and Syndication Activities within Venture Capital Markets

Absent superior performance with respect to 'Portfolio Innovation Focus' (unexpected innovation), this study finds 'less experienced' ('competing') VCs, which only coinvest with other less experienced VCs, become less reputable than alternate less experienced ('non-competing') VCs who coinvest with experienced VCs. The empirical evidence demonstrates innovation focus of non-competing VCs' syndicates are premised on demand for expertise of experienced VCs, and not influenced by syndicate size. Consistent with network size rationales for syndication, quid-pro-quo benefits of syndicate size enhance innovation focus within syndicates comprising of competing VCs. Applications of the single crossing property provide empirical evidence that differences between portfolios of non-competing and competing VCs are compatible with existence of Nash equilibriums, and heterogeneity in preferences. This study is first to empirically dichotomize and demonstrate coexistence of 'expertise' and 'quid-pro-quo' rationales for syndication in context of populations of cohort VCs operating within venture capital markets.

Underwriting of Municipal Debt and Placement Risk Premiums in Broker-Dealer Market Transaction Prices

This study examines the relationship between underwriter placement risk and market transaction prices using a sample of state general obligation bonds. We proxy underwriter placement risk using three variables: “when-issued” trades, underwriter syndicate size, and bond sale method. When-issued trades and larger underwriting syndicates have an inverse association with transaction prices (stated as percentage of par) and have a positive association with transaction yields (based on transaction price), all else constant. Negotiated sales have a positive relationship with transaction prices and a negative relationship with transaction yields.

Syndicate Size and the Choice of Covenants in Debt Contracts

ABSTRACT I investigate whether and how syndicate size influences the type of covenants used in debt contracts. Prior theory and evidence suggest renegotiation considerations from coordination difficulties in large syndicates and intertemporal transfers due to relationship lending in small syndicates are factors in the design of covenants. I find that for large syndicates, borrowers and lenders avoid the use of flexibility-reducing covenants that are more likely to impact negatively on value-enhancing corporate policies in good states of the world. This effect becomes stronger when the borrower has fewer outside financing options. Additionally, I find contracts with large syndicates are more likely to have more covenant slack, include performance pricing provisions, have tailored capital expenditure covenants, and principally rely on covenants that are directly linked to the current performance of the borrower. Collectively, these results imply that syndicate size and related renegotiation considerations affect how accounting information is used in debt contracts. JEL Classifications: G32; G21; C78; L14.

The Influence of Macro Factors on the Exit of Venture Capital—Take the Chinese Market as an Example

We control the investor and investment-specific factors to test how macro factors affect the exit of venture capital. After using a sample of 28668 VC investments in China, we discover that macro factors such as legal rights and GDP growth have a positive impact on successful exit, which means that macro factors can increase the likelihood of successful exit. Surprisingly, market liquidity which is one kind of macro factors can significantly reduce the likelihood of trade sale, which is different from our predictions. In addition, we find that the VC-backed firms with more amount investment and bigger syndicate size will have more opportunities to IPO, but the VC investors with more experience will decrease the likelihood of trade sale and liquidation.

Do Credit Default Swaps Affect Lending Practices? Evidence from Syndicate Structures and the London Whale Incident

This paper tests the monitoring concentration hypothesis that loan participants can transfer monitoring incentives back to lead arrangers by purchasing credit default swaps (CDSs) from lead arrangers with the capacity to sell such contracts. Monitoring concentration appears to play a significant role in reducing lead arrangers’ loan allocation, expanding syndicate size resulting in larger loans for borrowers, and increasing the usage of covenants. Other loan CDS dealers participating in the same syndicates dilutes the role of CDS in monitoring concentration because these dealers can also sell CDSs to non-dealer participants. The evidence is further supported by two robustness tests — the analysis of traditional term loans and the London Whale incident. Among the three types of loan facilities, traditional term loans have the highest likelihood that CDSs are purchased by the participant lenders because banks tend to keep these loans on their balance sheets. On the other hand, institutional term loans, which are arranged with the intention to be securitized or sold to institutional investors, are less likely to have CDS protections purchased by original participant lenders. In contrast to term loans, revolvers are lines of credit, i.e., the amount of loans may not be drawn. Therefore, participant lenders also have less need to purchase CDS protections. The above main findings are driven by traditional term loans. However, there are spillover effects to revolvers that are in the same loan packages with traditional term loans. The London Whale incident, which caused JP Morgan more than $6 billion trading losses in the CDS market, presents a unique opportunity to examine the effect of CDS on lending practices. During the event quarter, there is a clear shift of lending activities from CDS selling banks to non-CDS selling banks. In addition, arranger allocation increases and syndicate size reduces among CDS selling banks relative to non-CDS selling banks. The fact that not only the lending practices of JP Morgan but also those of other CDS selling banks are affected suggests a general mistrust of using CDS protections, which in term affects the loan syndicate structures of CDS selling banks. However, the effect is transitory and reversed during the following quarter. Overall, the findings indicate that financial innovations, such as CDSs, can profoundly impact banking practices.

Venture Capital Performance in China

This study investigates the determinants of venture capital (VC) performance in China. We focus on the impact of VC reputation, political connections, and managing partner/founder’s experience on the performance of domestic and foreign VC investments. After controlling for VC age, portfolio firm age, syndicate size, VC industry competition, and a number of other factors, we find little correlation between VC reputation and investment performance in the Chinese market. In contrast, we find that the institutional characteristics such as political connections of VC firms and managing partner/founder’s prior experience as managers and investment bankers are crucial to domestic VC success, but these have little impact on foreign VC performance. In particular, if a domestic VC firm is politically connected, or a managing partner/founder has more management experience or has previously worked as an investment banker, a portfolio firm is more likely to have an IPO exit through the Chinese mainland stock markets, and these VCs are also likely to speed up a portfolio firm’s exit through IPOs in China.

Exit behaviour of investment companies: the choice of exit channel

For investment companies, selling a portfolio company represents a critical phase in the investment life cycle. The choice of exit channel (initial public offering, secondary buyout, or trade sale) is of particular importance. This paper analyses factors relevant to exit channel selection, deploying a sample of 1,435 European buyout exits between 1992 and 2010. We differentiate between factors which refer to characteristics of the selling investment company and characteristics of the transaction object. Our analysis yields evidence that the reputation of the selling investment company, syndicate size, quality of the transaction object, as well as partial exit are associated with exit channel type. Moreover, our analysis reveals that the economic context and conditions in the capital markets significantly influence the choice of exit channel.

Voluntary Disclosure of Corporate Venture Capital Investments

In this paper we investigate drivers of corporate venture capital investment announcements. Using a comprehensive sample of investments made by corporate venture capital programs of publicly listed US corporations, we find that about 2/3 of the investments are publicly announced. Consistent with voluntary information disclosure theories, we find that a public announcement is less likely when the startup is in the seed-stage, but more likely when the parent company is large, spends heavily in internal R&D and capital expenditures, has high leverage ratio, and faces more information asymmetry problems. These results are robust to controlling for syndicate size and structure. We further examine the stock price reaction to announcements. On average, the abnormal return of announced deals is around 2.1% at announcement date. Controlling for endogeneity of the announcement decision, we find that parent companies facing most severe asymmetric information problems enjoy highest abnormal returns.

The Design of Covenant Lite Loans: An Empirical Investigation

This paper demonstrates that the use of covenant lite loans is a result of costly renegotiation and coordination arising from large lending syndicates. Consistent with the renegotiation friction explanation, syndicate size and the participation of institutional investors are positively associated with the issuance of covenant lite loans. In addition, I find that covenant lite loans are modified less frequently. Costly renegotiations also imply that it is possible for borrowers to pay less to obtain covenant lite structure when the composition of lending syndicates hinders the effective enforcement of covenants. There is evidence supporting this conjecture. This paper also shows that lenders of covenant lite loans resort to other means of monitoring to resolve agency issues of debt that involve less renegotiation cost, such as performance pricing, collateral, requiring a loan sponsor and negative covenants.

Private Equity Exits: Effect of Syndicate Size, Foreign Certification and Buyout Entry on Type of Exit

The choice of exit outcome between IPO and acquisition is an inevitable decision faced by entrepreneurs and private equity investors. Hence, it is important to determine what factors influence this choice of exit outcome. The existing literature addresses four categories of factors which influence this choice: industry-related factors, market-timing variables, deal-specific factors and demand for funds factors. However, in the presence of private equity investors, this decision becomes more complicated. Thus, we extend the literature by introducing a new category of factors, ‘private equity investor characteristics’ and test if this category has a significant effect on the choice of exit mechanism. We also test if type of entry has an influence on type of exit. This paper also contributes to the literature by being the first to examine the choice of PE exit in an emerging market like India. We find that private equity investor characteristics play an important role in the choice of exit mechanism. The existence of a large syndicate of private equity investors in the same firm increases the probability of an IPO exit but the presence of a foreign private equity investor reduces this probability. Moreover, unlike in the US, the cost of debt does not affect the choice of exit mechanism in India. We further consider detailed exit outcomes like strategic sale, financial sale and buyback and find consistent results. We also find that the type of entry has an influence on type of exit. Specifically, we find that in buyout transactions, the probability of an IPO exit is less than that of a strategic sale. Finally, we present a unique finding that the probability of a buyback as opposed to an IPO is higher if a firm is in the real estate sector.

Syndicate Size In Global IPO Underwriting

This study analyzes factors that determine syndicate size in ADR IPO underwriting. The information gathering role of investment bankers, complexity and risk of issue, corporate governance and transparency environment factors, and potential business relations are the basis for the analyses. Empirical results indicate decreasing syndicate size over time. No significant relation is found between syndicate size and initial day return of IPOs. The transparency environment, dilution effect of the issue, growth stage of the issuer, lead underwriter reputation, offering size and ownership concentration are found to have significant effects on syndicate size.

Investment Banks’ Entry into New IPO Markets and IPO Underpricing

We examine investment banks’ strategic entry and market share gain in the new China H-share IPO (HIPO) market since 1993. Investment banks would have the incentive in initial years to obtain the HIPO business by low balling, i.e., providing high offer prices to the issuer, leading to a lower underpricing and leaving less money on the table, so as to learn and gain expertise on China companies and business and build their superior information. Consistent with this argument we find that compared to Hong Kong company IPOs, investment banks who handle many HIPOs on average underprice HIPOs much less. The lower underpricing of HIPOs is driven by the first few HIPO deals and HIPOs handled during the initial period (i.e. 1993-2000). In later years (2001-2007) these same investment banks underprice HIPOs in a similar way compared to that of HKIPOs. We also find that the syndicate size of investment banks who handle many HIPOs is smaller than other investment banks handling HIPOs. These results suggest that investment banks initially lowball to gain expertise, and build up their superior information on China business.