Scribd Logo
Upload

Welcome to Scribd!

  • 42 views

    The Market Share in IPOs

    Uploaded by

    Samin Sakib
    This document discusses factors that affect investment banks' market shares in IPO underwriting. Specifically, it examines how banks gain or lose market share based on pricing accuracy, industry specialization, analyst coverage, and reputation. It also looks at reasons why issuers may change underwriters, such as analyst coverage, reputation, and aftermarket support. Finally, it recommends strategies for new entrants to establish themselves, like developing expertise in a sector through research before underwriting, maintaining pricing accuracy, and focusing on building reputation through analyst coverage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    The Market Share in IPOs

    Uploaded by

    Samin Sakib
    42 views4 pages
    This document discusses factors that affect investment banks' market shares in IPO underwriting. Specifically, it examines how banks gain or lose market share based on pricing accuracy, industry specialization, analyst coverage, and reputation. It also looks at reasons why issuers may change underwriters, such as analyst coverage, reputation, and aftermarket support. Finally, it recommends strategies for new entrants to establish themselves, like developing expertise in a sector through research before underwriting, maintaining pricing accuracy, and focusing on building reputation through analyst coverage.

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses factors that affect investment banks' market shares in IPO underwriting. Specifically, it examines how banks gain or lose market share based on pricing accuracy, industry specialization, analyst coverage, and reputation. It also looks at reasons why issuers may change underwriters, such as analyst coverage, reputation, and aftermarket support. Finally, it recommends strategies for new entrants to establish themselves, like developing expertise in a sector through research before underwriting, maintaining pricing accuracy, and focusing on building reputation through analyst coverage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views4 pages

    The Market Share in IPOs

    Uploaded by

    Samin Sakib
    This document discusses factors that affect investment banks' market shares in IPO underwriting. Specifically, it examines how banks gain or lose market share based on pricing accuracy, industry specialization, analyst coverage, and reputation. It also looks at reasons why issuers may change underwriters, such as analyst coverage, reputation, and aftermarket support. Finally, it recommends strategies for new entrants to establish themselves, like developing expertise in a sector through research before underwriting, maintaining pricing accuracy, and focusing on building reputation through analyst coverage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    FIN 4103

    Investment Banking
    Lecture Notes

    Lecture 6: The Market Share in IPOs


    The previous lectures showed how the direct and indirect costs of IPOs affect the issuers. The
    choice of the underwriter is not only determined by the fee, but also by additional factors like
    analyst coverage, underpricing etc. In this lecture we will see how these factors affect the choice
    of the underwriter and hence the market shares.
    This will then enable us to derive recommendations for new investment banks how establish
    themselves in the market.
    The questions looked at in this lecture are:
    1. How do investment banks gain or lose market shares?
    2. What makes issuers change their underwriter?
    3. How can new entrants establish themselves in the IPO market?

    How do investment banks gain or lose market shares?


    The quality of the services of an investment bank cannot be measured, as the costs are difficult to
    determine ex ante. Issuers therefore have to rely on the reputation of an investment bank for their
    decision. A high reputation consequently corresponds to a high market share, its thus self-
    reinforcing. The reputation cannot be measured directly, but it can be approximated by market
    share with the foresaid.
    The factors that have been found to be important are:
    • Precision of pricing
    Underpricing imposes costs on the issuers by leaving money on the table. Investment banks with
    a high underpricing will not be very popular with issuers and hence lose market share.

    1|Page
    Overpricing is also not beneficial for investment banks. The role of investment banks is also to
    certify the value of the shares for investors. When overpricing this certification has failed and
    investors will in the future be reluctant to buy shares offered by this investment bank.
    • Prospects of the company
    Part of the certification role of investment banks is also the evaluation of the long-term prospects
    of a company. Investors will be reluctant to buy shares from investment banks frequently
    offering shares of companies with no long-term prospects. The recent dot.com boom and the fall
    in the prices of most of these companies has already severely damaged the reputation of
    investment banks, especially those heavily involved in those issues.
    • Underwriting spread
    A low fee can give incentives for issuers to use this investment bank, despite other, higher costs,
    based on the overall cost evaluation of the issue. This strategy works for less well established
    investment banks.
    Reputable investment banks, however, charge high fee in order to show strength and confidence
    in the value of their reputation, which is put at risk with each offer. We should therefore expect
    adverse effects of such a bank reducing its fee as it can be interpreted as having lost its
    reputation.
    • Industry specialization
    Experience is central for evaluating companies, specialization can therefore increase the
    precision of pricing and other aspects of the offer due to information spill-overs from other
    issues. For well-established investment banks, however, a specialization reduces the amount of
    business that can be acquired and therefore the bank has to give up this strategy, although an
    emphasis may be still visible.
    • Analyst coverage
    The possibility of a high level analyst coverage in the aftermarket is central for the success of an
    IPO. Future analyst recommendation are an additional certification of the value of the shares.
    Having a high level analyst reputation will increase the market share. The analyst reputation was
    found to be one of the most important factors.
    • Withdrawn offers
    Withdrawals of offers, for whatever reason, damage the reputation of an investment bank and
    hence reduce its market share. The initial certification is withdrawn, making investors reluctant

    2|Page
    to any future issues and issuers do not want to be associated with these events.

    What makes issuers change their underwriter?


    Another way to look at the importance of factors influencing the market share of investment
    banks, is to investigate reasons for companies changing the underwriter for a secondary offering.
    The companies will build on their experience from the IPO in making this decision. It was
    empirically found that companies were generally not dissatisfied with the way their IPO was
    handled, but that changes are the result of other factors. The possible factors for a change are:
    • Pricing
    The investment bank left too much money on the table and the issuer wants to avoid this
    situation to happen a second time, or the issue was overpriced and a new underwriter should
    ensure investors that this will not be that case again. The empirical result was that the decision to
    switch was not so much the fact of underpricing but the comparison of the actual proceedings
    with the expected.
    A high return was then attributed to the quality of the roadshow. In general the companies were
    satisfied with this service.
    • Placement strategy
    The allocation of shares was not according to the companies preferences (mix of long-term
    investors and stock flippers, types of investors etc.)
    Companies were also satisfied with this strategy and it was not found to be an important factor.
    • Aftermarket support
    The investment does not provide sufficient liquidity and/or other price support for the shares, e.g.
    market making. This aspect was found to be relevant, but dwarfed by the following two factors.
    • Analyst coverage
    The research of the bank did not cover the company sufficiently, i.e. the frequency of reports
    were too low. The issuer would like to extent that coverage by choosing another underwriter. It
    was not found empirically that companies wanted to buy more favorable coverage, although it
    can be expected to be the case.
    • Reputation
    The companies want to use an investment bank with a higher reputation as they have grown in

    3|Page
    the meantime and are now in a position to be able to afford this step and the new investment
    bank to be interested. The last two factors are the most important determinants for the change of
    the underwriter in a secondary issue.
    We can now use these results to derive some conclusions on how new market entrants can gain
    market shares in the IPO market.

    How can new entrants establish themselves in the IPO market?


    From the above analysis we can derive the following possible strategy:
    • Given the initial lack of any reputation, it is central to establish a certain name in the market.
    Given the importance of the above factors, it would the best to do so through high quality
    research (analyst coverage), i.e. brokering activities, and market making.
    This would establish the name in the market, although at first they would not be acting as
    underwriter. Only after a certain name has been established the underwriting activities
    commence.
    • Specializing in a certain sector gives high expertise, that cannot be guaranteed for the entire
    stock market given the limited resources available at the beginning; and allows to attract first
    customers. Charging low fees as a sweetener will facilitate this process. Later on the fees can be
    increased and underwriting being diversified into other sectors.
    • Building on the acquired expertise in the sector a good pricing of the issue is essential as is to
    underwrite only issues of companies with good long-run prospects, i.e. not to underwrite
    everything just to gain market share as the reputation will suffer from this strategy. Despite the
    importance of general reputation, the analyst coverage seems to be the most important factor for
    the market share of an investment bank. The next lecture will therefore have a closer look at the
    interaction of analysts and the underwriting (as well as M&A) department of an investment bank.

    4|Page

    You might also like