Initial Public Offerings and Underwriter Reputation




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    • College of Business Administration, Iowa State University and the Commodity Futures Trading Commission, Division of Economic Analysis, respectively. Dr. Manaster was at the University of Utah during the conduct of most of this research. The views expressed are solely those of the authors and do not purport to represent those of the Commodity Futures Trading Commission or its staff. We would like to acknowledge the useful comments of our colleagues Sanjai Bhagat, Jeff Coles, Dick Jefferis, Uri Lowenstein, and Jay Ritter. Our interactions with Dick Jefferis in particular helped to identify and clarify several critical issues. We would also like to thank Jay Ritter for the provision of data. Support from the University of Utah Graduate School of Business, the Garn Institute of Finance, and Iowa State University is gratefully acknowledged. Substantial technical assistance was provided by Denise Woodbury. We would also like to thank the staff at the Chicago Library of Arthur Andersen and Company for their assistance. We alone are responsible for any errors or omissions.


This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.