Heterogeneous Beliefs, IPO Valuation, and the Economic Role of the Underwriter in IPOs


  • Thomas J. Chemmanur,

  • Karthik Krishnan

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    • Thomas J. Chemmanur is a Professor of Finance in the Carroll School of Management, Boston College in Chestnut Hill, MA. Karthik Krishnan is an Assistant Professor of Finance in the College of Business at Northeastern University in Boston, MA.

  • This paper was previously circulated under the title, “Heterogeneous Beliefs, Short Sale Constraints, and the Role of the Underwriter in IPOs.” For helpful comments and discussions, we thank Douglas Cook, Iraj Fooladi, Elena Loutskina, Gang Hu, and seminar participants at Boston College, Babson College, Dalhousie University, the 2008 FIRS Conference, the 2008 European Finance Association Annual Meetings, the 2007 Financial Management Association Annual Meetings, and the 2007 Eastern Finance Association Annual Meetings. Special thanks to the Bill Christie (Editor) and an anonymous referee for helpful comments and suggestions that greatly improved the paper. Thomas Chemmanur acknowledges summer support from the Carroll School of Management at Boston College. All errors and omissions remain are own.


We empirically analyze the economic role of the underwriter in initial public offerings (IPOs), distinguishing between the “certification” and “market power” hypotheses. We find that equity in high-reputation underwriter backed IPOs is priced higher and further away from intrinsic value than that in low-reputation underwriter backed IPOs. Our results are robust to controlling for the endogenous selection of firms to take public by underwriters. Overall, our results support the market power hypothesis and reject the certification hypothesis, indicating that the role of underwriters is to obtain the highest possible valuation for the IPOs that they back rather than to price the equity close to intrinsic value.