sinners or saints? top underwriters, venture capitalists, and ipo … · 2018. 12. 5. · anzhela...

Sinners or Saints? Top Underwriters, Venture Capitalists, and IPO Underpricing

Kose John*

Anzhela Knyazeva

Diana Knyazeva

Preliminary: Do not cite or quote

This version: September 6, 2018

Abstract

This paper examines strategic interactions between venture capitalists (VCs) and top underwriters in the IPO process. We test two contrasting hypotheses: certification and rent extraction. On the one hand, the joint involvement of VCs and top underwriters can amplify their certification effect, reducing IPO underpricing. On the other hand, the rent extraction incentives of VCs and top underwriters, particularly in a repeated dealing context, can increase underpricing. We test these contrasting effects on IPO underpricing in the cross-section and around two regulatory shocks. First, VC-backed IPOs, VC-backed deals with top underwriters, and deals with stronger VC-underwriter ties exhibit greater underpricing. The cross-sectional results continue to hold in two-stage least squares estimation with geographical instruments. Second, the 2012 JOBS Act decreased disclosures by issuers and increased informational asymmetry. We find that IPO underpricing increased among VC-backed IPOs involving top underwriters after the JOBS Act. Third, a 2003 NASD rule limited explicit rents that may be extracted from preferential allocations of new IPO issues. We find that VC-backed IPO underpricing declined after the shock, and the effect was concentrated among VC-backed deals involving top underwriters and VCs with ties to underwriters. Importantly, we find no effect of top underwriters alone unless a VC is also involved. The observed decline in IPO underpricing cannot be explained by analyst involvement or the passage of Regulation FD. Moreover, repeat dealing between large institutions and underwriters similarly increases underpricing, but the effect does not explain the role of VC-underwriter ties and does not decline after the 2003 shock. Overall, our results support rent extraction, shed new light on the effects of VC backing, underwriters, and institutions on IPO underpricing, and emphasize the role of strategic interactions between them in the post-dot-com period.

Keywords: IPOs, venture capital, underwriters, institutional buyers, repeat dealing, conflicts of interest, JOBS Act, NASD Rule 2790

JEL classification: G30, G32, G38

* Kose John, New York University, Stern School of Business, [email protected]; Anzhela Knyazeva, SEC,

[email protected]; Diana Knyazeva, SEC, [email protected]. The paper has benefited from helpful comments and suggestions of Michelle Lowry and SEC workshop participants. All errors and omissions are our own.

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the authors’ views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. This paper is part of the Division of Economic and Risk Analysis’ Working Paper Series. Papers in this series are the work of the authors and not the work of the Division or the Commission. Inclusion of a paper in this series does not indicate a Division or Commission determination to take any particular action or position. References to this paper should indicate that the paper is a “DERA Working Paper.”

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1. Introduction

Initial public offerings (IPOs) have long been an important mechanism for raising

external financing, and IPO underpricing is an essential component of an issuer’s cost of capital

raised in the offering. Recently, trends in the IPO market have attracted significant attention from

academics, practitioners, and regulators. For example, several papers document significant shifts

in IPO activity after the 2012 passage of the JOBS Act.1 The broader IPO underpricing literature

has explored the role of top underwriters and the role of venture capitalists (VCs) in IPO

underpricing.2 However, there is a relative dearth of evidence on how these crucial market

participants interact in the IPO process.

This paper fills the gap and tests the effects of strategic interactions between VCs, top

underwriters, and institutional investors on IPO underpricing. We focus on the post-dot-com

period and test the effects in the cross-section and around two quasi-natural experiments. First,

the JOBS Act reduced burdens on IPO firms by scaling back process and disclosure requirements

for the vast majority of IPOs. This increased the amount of information available about the

typical issuer, magnifying information asymmetries about issuer firms. Second, a 2003 NASD

rule restricted preferential allocations of IPO shares. This limited private benefits that may be

extracted in the IPO process through underwriter’s preferential IPO allocations to VC fund

managers and institutional investors, among others.

We formulate two competing hypotheses about the roles of VCs and underwriters in the

context of IPO pricing. First, the “certification” hypothesis suggests that underwriters and VCs,

1 For example, Dambra, Field, and Gustafson (2015); Dambra, Field, Gustafson, and Pisciotta (2018); Chaplinsky,

Hanley, and Moon (2017); Barth, Landsman, and Taylor (2017). 2 For example, Loughran and Ritter (2004); Lowry and Schwert (2004); Lowry and Murphy (2007). Early studies find that VCs decrease underpricing by reducing uncertainty about issuers through certification and monitoring, whereas studies of IPOs during the nineties find that VCs increased underpricing (e.g., Gompers (1996); Lee and Wahal (2004); Loughran and Ritter (2004); Liu and Ritter (2011); Cliff and Denis (2004)).

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through their combined reputation with market participants, credibly signal their private

information about issuer quality and reduce investor information asymmetry. Empirically, the

certification hypothesis would predict that IPO underpricing decreases with top underwriter and

VC involvement, and the effect is stronger when both are involved in a deal. In addition, under

the certification hypothesis, repeat dealing between VCs and top underwriters should reinforce

incentives to carefully screen issuers and increase the strength of the signal to the market from

their involvement, reducing underpricing. Moreover, when information asymmetry increases,

such as when issuers are required to disclose less information publicly, VCs and top underwriters

should play a greater certification role. In 2012, the JOBS Act allowed most IPO issuers to adopt

scaled disclosure, which has been linked to increased information asymmetry and underpricing

(e.g., Chaplinsky et al. (2017); Barth et al. (2017); Gullapalli and Knyazeva (2017)). Under the

certification hypothesis, the presence of VCs and top underwriters should result in a larger

reduction in underpricing after the 2012 shock. In turn, when information asymmetry decreases,

the certification effect should become smaller.

Second, the “rent extraction” hypothesis suggests that underwriters and VCs have

strategic incentives to underprice the IPO at a cost to the issuer (borne by the pre-IPO investors

of the issuer). For example, underwriters can benefit from IPO underpricing directly if they hold

underwritten securities. In addition, underpriced deals are more likely to experience a jump in

price after the IPO, which is favored by IPO investors. As a result, underwriters enjoy indirect

reputational benefits of underpricing, making it easier to build the book for future IPOs.

Moreover, underpricing decreases the odds of the price declining below the offer price, reducing

litigation risk. Similarly, VCs may benefit from IPO underpricing. For a portion of our sample

period, prior to the 2003 shock, managers of VC funds were able to receive preferential

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allocations from top underwriters in other “hot” underpriced IPOs. During the entire period, VCs

receive reputational benefits from having backed a successful IPO, making it easier to raise

future VC funds (e.g., Lee and Wahal (2004); Gompers (1996)). In addition, top underwriters

may be more willing to facilitate future IPO exits of this VC from other portfolio firms if

previous deals were underpriced and, therefore, benefited underwriters.

The rent extraction hypothesis would generally predict that the individual involvement of

VCs and top underwriters results in greater underpricing, and the effect is stronger when VCs

and top underwriters are jointly involved. VCs can exert significant influence on the decisions to

go public as well as the choice of underwriters and deal terms with respect to other portfolio

companies. In addition, when VCs transact with the same underwriters in the course of multiple

deals, repeat dealing incentives are stronger and underpricing can increase the willingness of a

top underwriter to facilitate future IPO exits by the VC. As a result, the hypothesis would predict

that the joint presence of VCs and top underwriters and VCs with ties to underwriters would lead

to greater underpricing. Further, when the information asymmetry about issuers increases, the

potential for such rent extraction through underpricing can increase as well. When there is more

uncertainty overall, VCs and underwriters could be in a better position to use their informational

advantage to coordinate on greater underpricing. Thus, this hypothesis would predict that the

joint presence of VCs and underwriters should increase underpricing after the 2012 enactment of

the JOBS Act, which allowed most IPO issuers to provide less disclosure, increasing the

information asymmetry.

Finally, a 2003 regulatory shock allows us to further test the rent extraction hypothesis. In

2003 NASD issued a rule restricting preferential allocations of new issues by underwriters to

money managers. Prior to the rule, underwriters could preferentially allocate shares in ‘hot’

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IPOs, which gave rise to explicit conflicts of interest with respect to underwriting. For example,

VC fund managers could agree to underprice the IPOs of firms they control and steer future

investment banking business to connected underwriters in exchange for preferential allocations

in other underpriced IPOs (see, e.g., Loughran and Ritter (2004) examining cases of preferential

allocations in the late nineties). The rent extraction hypothesis would predict that the 2003 shock,

which restricted such practices, reduced incentives for strategic underpricing in VC-backed IPOs

involving top underwriters.

Our main findings are threefold. First, VC-backed IPOs, on average, remained more

underpriced in the two decades after the dot-com bubble. The underpricing is most pronounced

for VC-backed IPOs involving top underwriters and VC-backed IPOs involving VCs with close

repeat dealing ties to underwriters. Second, the 2012 shock, which increased the informational

advantage of VCs and underwriters, led to an increase in underpricing of VC-backed IPOs

involving top underwriters and VC-underwriter ties. Third, the 2003 NASD rule, which limited

preferential IPO allocations, decreased the underpricing of VC-backed IPOs, and particularly,

VC-backed IPOs involving top underwriters and VCs connected to underwriters.

Overall, our results suggest that the rent extraction effect dominates the certification

effect. These findings highlight strategic incentives of VCs connected to underwriters with

respect to IPO pricing in general, and in conjunction with regulatory shocks that impacted their

rent extraction ability related to IPO pricing. Our results shed new light on the implications of

VC backing for IPO pricing and information flows of IPO issuers and uncover an important

dimension of implicit incentives stemming from ties between VCs and top underwriters.

We also examine other dimensions of incentive conflicts that could affect underpricing.

First, underwriter-specific conflicts alone do not appear to explain our findings. While

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underwriters may have their own incentives to underprice, we observe a significant interaction

effect of VCs and top underwriters and a significant effect of VC-underwriter repeat dealing.

Second, we consider whether ties between top underwriters and VCs are merely

capturing parallel ties between top underwriters and large institutions, whereby underwriters

underprice deals to build a relationship with key institutions that would buy stakes in this

underwriter’s future IPOs. We find evidence of higher underpricing when underwriters engage in

repeat dealing with large institutions in the context of IPOs (underwriters underprice IPOs and

institutions invest in IPOs backed by the underwriter). However, we do not find that such

implicit incentives to underprice changed as a result of the 2003 or 2012 shocks and thus do not

appear to be behind the effects of VC/underwriter ties around the shocks.

We also evaluate the possibility that VCs’ preferences for analyst coverage, which

underwriters might facilitate, can explain greater underpricing in VC-top underwriter deals. We

check if the post-2003 decline in the underpricing of VC-top underwriter IPOs was due to the

analyst effect (e.g., due to reduced ability to secure favorable coverage from the underwriter after

the Global Settlement). We also examine the underpricing of VC-top underwriter IPOs around

the 2000 adoption of Regulation FD. Overall, while important for IPO bargaining dynamics in

earlier periods, the analyst channel does not appear to account for our main results on VC-

underwriter strategic interaction during our sample period (2000s and 2010s).

The remainder of the paper is organized as follows. Section 2 describes the institutional

background and related literature. Section 3 describes data and variables. Section 4 presents the

main results and robustness checks. Section 5 concludes.

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2. Background and related work

Institutional background: shocks

Our empirical design utilizes two regulatory shocks. First, the JOBS Act enacted in April

2012 allowed companies that qualify for “emerging growth company” (EGC) status to provide

reduced disclosure during an IPO. Close to 90% of IPO issuers meet this definition. Prior studies

showed that underpricing increased after 2012 due to increased information asymmetry (e.g.,

Chaplinsky et al. (2017), Barth et al. (2017)).

In addition, about a decade prior to the enactment of the JOBS Act, media and academic

studies examined the possible presence of underwriter conflicts of interest in IPOs, such as

‘spinning’ and ‘tie-in’ arrangements.3 At issue was the practice of underwriters allocating

underpriced IPO shares to reward preferred investors, VC managers and other money managers,

and corporate insiders motivated by quid pro quo – efforts to secure future business. Investors

receiving hot issue allocations are expected to use the bank for future trading business while VCs

and insiders receiving hot allocations in other IPOs are expected to steer investment banking

business to the bank. While this practice benefited underwriters—and in a repeated game setting,

the preferred investors, VCs, and insiders—it disadvantaged other investors. From the standpoint

of the issuer, the higher underpricing raised the cost of the IPO to the issuer.

Thus, our second regulatory shock is a 2003 change that curtailed such IPO practices. On

October 24, 2003, the National Association of Securities Dealers (NASD) adopted Rule 2790,

Restrictions on the Purchase and Sale of Initial Equity Public Offerings, to strengthen protections

for investors in IPOs by ensuring that:

3 For example, Weinberg, Ari, 2002, A spin down Wall Street's ladders, Forbes, November 6, 2002, https://www.forbes.com/2002/11/06/cx_aw_1106spinning.html; Maynard (2002); Griffith (2003); Hurt (2005); Fanto (2008); Barondes (2005); Levy (2004); Townsend (2004).

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“(i) underwriters make a bona fide public offering at the offering price;

(ii) do not withhold securities for their own benefit, or use allocations of IPO securities to

reward persons that can direct future business to the investment bank (including money

managers, such as venture capitalists and hedge fund managers, who are in a position to

direct business to a broker-dealer); and

(iii) ensuring that industry “insiders,” including underwriters and their associated persons,

do not take advantage of their position to purchase new issues.”4

Rule 2790 codified elements of the prior interpretative guidance on hot IPOs (ones that

trade at a premium when secondary trading begins), as well as expanded its scope to all new

issuers and modified certain restrictions (for example, eliminating the ability to make a facts-

and-circumstances decision to allocate IPO shares to restricted persons in some cases).5

Compliance was required by March 23, 2004.

Separately from this rule change, other events affecting analysts and governance occurred

in 2000-2003 (see Appendix), including Regulation Fair Disclosure (FD), Regulation Analyst

Certification (AC), the Global Settlement, and Sarbanes Oxley Act. In supplemental tests, we

distinguish our findings from those effects by varying sample criteria and shock timing.

Related work

This paper builds on three branches of prior literature. First, most recently, several studies

document an increase in information uncertainty and IPO underpricing after the 2012 JOBS Act

shock (e.g., Chaplinsky et al. (2017), Barth et al. (2017)). Our tests of the 2012 shock build on

4 NYSE/NASD IPO Advisory Committee, Report and Recommendations, May 2003, pp. 10-11, https://www.finra.org/sites/default/files/Industry/p010373.pdf.

5 Id. In addition, a Voluntary Initiative announced in April 2003 and effective in October 2003 involved major underwriters limiting hot IPO allocations to executives and directors. In robustness tests, we test whether dating the shock to April 2003 affects our results.

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this work, using the shock as a quasi-natural experiment. Specifically, the setting allows us to

examine the role of strategic interactions between VCs and top underwriters when information

asymmetry becomes severe.

Second, this paper relates to a large literature on IPOs and IPO underpricing (see, e.g.,

Ljungqvist (2007) and Lowry, Michaely, and Volkova (2017) for a survey). Some studies find a

negative effect of a prestigious underwriter on underpricing while other studies find an

insignificant or positive effect (e.g., Carter and Manaster (1990); Carter, Dark, and Singh (1998);

Loughran and Ritter (2004); Lowry and Schwert (2004); Liu and Ritter (2010, 2011); Lowry and

Murphy (2007); Lowry, Officer, and Schwert (2010); Loughran and McDonald (2013)).

Evidence on the effect of VCs on underpricing has also been mixed and sensitive to the time

period, with some studies finding a negative effect (consistent with certification), and other

studies finding a positive or insignificant effect (consistent with rent extraction), particularly in

late nineties and early 2000s (e.g., Barry et al. (1990); Megginson and Weiss (1991); Loughran

and Ritter (2004); Lowry and Schwert (2004); Liu and Ritter (2010, 2011), Lowry and Murphy

(2007), Lowry et al. (2010), Loughran and McDonald (2013)). Proposed explanations for a

positive effect of VC backing have included grandstanding (Gompers (1996); Lee and Wahal

(2004)), hot issue allocations (e.g., Loughran and Ritter (2004, 2010)), and pursuit of analyst

coverage (e.g., Cliff and Denis (2004) and Loughran and Ritter (2011)). Lowry et al. (2010)

note, however, that underpricing tests are sensitive to the inclusion of the dot-com bubble.

A recent study by Chemmanur, Krishnan, and Yu (2018) shows that VC backing draws

greater investor attention to IPOs, proxied by media attention, which enables underwriters to

disseminate information and gather information from investors more effectively, leading to

higher IPO and secondary market valuations.

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Building on this research, we control for the direct effects of top underwriters and VCs on

IPO underpricing. Crucially, we focus on the effects of strategic interaction and repeat dealing

ties between top underwriters and VCs, identify the effects using quasi-natural experiments, and

show that the effects of interest continue to be highly relevant in recent decades, after various

regulatory interventions. We account for the analyst coverage effect and run a horse race

between certification and rent extraction hypotheses.

Third, several studies have considered preferential IPO allocations and analyst lust as a

motivation for high underpricing during the eighties and nineties (e.g., model in Biais, Bossaerts,

and Rochet (2002) and evidence in Hanley and Wilhelm (1995) and Aggarwal, Prabhala, and

Puri (2002)). Loughran and Ritter (2004) and Liu and Ritter (2010) examine evidence from

preferential allocation cases during the dot-com period. Similarly, some work tests whether

analyst lust is a motivating factor for the underpricing of VC-backed IPOs. For example, Cliff

and Denis (2004) and Loughran and Ritter (2011) linked star analyst coverage to underpricing.

However, Bradley, Kim, and Krigman (2015) found that star analyst coverage stopped to affect

underpricing during 2001-2011, including for top VC deals, due to changes such as the effects of

Regulation FD and Global Settlement. Tests considering Regulation FD relate to studies showing

that it reduced selective access of analysts to private information (e.g., Charoenrook and Lewis

(2009); Mohanram and Sunder (2006); Findlay and Mathew (2006)). In a related paper, Hoberg

and Seyhun (2009) propose and test hypotheses about collaboration between underwriters and

venture capitalists, centering on IPO allocations, analyst coverage, and insider selling in IPOs

during 1988-2000. They show that VCs with more underpriced deals received more long-term

marketing support and favorable analyst coverage during that period, while underwriters

received repeat business and profit from allocating underpriced shares. In this paper, we account

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for the potential analyst channel of VC – underwriter interactions and show that the 2003 shock

to preferential allocations helped reduce underpricing in VC-backed top underwriter deals, but

such underpricing continues to persist in our sample ending 2016. We also examine whether

reputation and repeat dealing with institutional buyers helps moderate the effect and examine

changes to the role of VC-underwriter ties for underpricing after the 2012 shock.

Overall, our paper contributes to existing research in several important ways. We show

that IPO underpricing of VC – top underwriter deals is not limited to the tech bubble and persists

into late 2016, despite close to two decades of learning by market participants and regulatory

interventions to address conflicts of interest in analyst coverage, governance, IPO allocations,

and efforts to stimulate IPO activity. We test for causal impacts by relying on two quasi-natural

experiments that affected the information environment of issuers and the repeat dealing

incentives of VCs and underwriters, as well as by using geographical instruments. In addition,

we examine repeat dealing between institutional investors and top underwriters. We show that

such incentives contribute to IPO underpricing, remain unaffected by the 2003 shock to

preferential allocations or the JOBS Act, and do not explain the VC – top underwriter

interactions. Finally, we do not find that analyst coverage is a significant channel for the VC –

top underwriter effect on underpricing during the post-dot-com period.

Our paper provides significant new insights. First, we show that VC-backed deals with

top underwriters exhibit significantly higher underpricing, particularly when a given VC –

underwriter pair has been involved in multiple IPO deals in previous years. Second, VC-backed

deals ran by top underwriters experienced significantly more underpricing after the 2012 JOBS

Act. This is consistent with VCs and top underwriters using their information advantage to

coordinate on underpricing rather than to play a certification role. Third, we examine the effects

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of VCs and top underwriters on IPO underpricing using a new quasi-natural experiment around

NASD Rule 2790 shock to IPO allocations. The effect of the shock on underpricing was

concentrated among VC-backed IPOs with top underwriters. Crucially, the effect was

pronounced for non-star analyst covered deals, suggesting that the elimination of conflicts in

research analyst coverage only partly explained the reduction in VC-backed IPO underpricing.

Fourth, we examine the effects of the shock to hot allocations and analyst coverage on the

underpricing of IPOs with top underwriters. We do not observe a significant effect of the 2003

shock on non-VC IPOs, suggesting that the effects of these changes involved an interaction

between conflicts of interest of VCs and underwriters. Finally, we explore the role of strategic

interactions between institutional investors and top underwriters. While such ties increase

underpricing on average, they are not affected by the 2003 shock to preferential allocations or the

2012 shock to issuers’ information environment, and thus do not seem to explain the direction of

the VC/underwriter effects. Overall, our evidence strongly supports the hypothesis about rent

extraction by VCs and top underwriters in a repeat dealing context and does not support the

certification hypothesis.

3. Data

The IPO sample is obtained from Dealogic Equity Capital Markets database. Consistent

with prior IPO studies, the sample excludes blank checks, special purpose acquisition companies

(SPACs), deals that do not list on a major exchange (NYSE/Amex or NASDAQ), small issuers

(proxied by deals with offer prices below $5 or offer value below $10 million), American

Depository Receipts (ADRs) offerings, and IPOs of foreign private issuers and other issuers

incorporated abroad, closed-end funds, real estate investment trusts (REITs), energy and

commodity trusts, and unit offerings (e.g., partnerships). Deals for which over one year has

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elapsed between announcement and offer date are also excluded from the main sample because a

long time to offer may indicate obstacles arising in deal marketing or other significant changes

on the issuer’s end. Deals missing information on first-day returns or deal values are excluded.

Our main dependent variable, underpricing, is defined as the first-day IPO return, which

is a standard measure of IPO underpricing.

Cross-sectional tests examine the effects of VC and top underwriter presence (see

Loughran and Ritter (2004); the top underwriter indicator is based on the lead underwriter

(where multiple managers are present, the name of the first manager in the underwriter table is

used)). Given the hypothesis about VC/underwriter interaction and incentives, we also interact

the VC backing indicator and the top underwriter indicator. In addition, we introduce measures

of VC/underwriter ties and institution/underwriter ties. Those measures consider the historical

overlaps between the same underwriter and VC and between underwriters and institutions

involved in the deal on prior deals to capture the potential strength of incentives arising from

repeated interaction.

To avoid major confounding market events, the tests begin in 2001, after the dot-com

period (e.g., Lowry et al. (2010) show that the dot-com period dramatically affected

underpricing), and exclude financial crisis years (2008 and 2009), which were characterized by

extremely unfavorable market conditions and a lack of IPO activity. Robustness tests add

financial crisis years back into the sample and start the sample period earlier.

Tests of the shock effects interact the post-shock period indicator with VC backing,

VC/underwriter ties, or institution/underwriter ties. The post-2003 shock indicator equals 1 in the

period after the adoption of NASD Rule 2790 (October 2003). Tests examining the 2003 shock

use the 2001-2007 sample period. Robustness tests end the sample period in 2005 or 2006 or

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start the sample period earlier, in 1998. The post-2012 shock period indicator equals 1 in the

period after the enactment of the JOBS Act (April 2012) that introduced the EGC status and

associated disclosure relief, which became available to most IPO issuers after that time. The tests

examining the 2012 shock use the 2010-2016 period. Due to collinearity, tests of post-shock

interaction effects consider either interaction with the VC effect or interaction with the

VC/underwriter joint or ties. Robustness tests account for the effects of the 2000 Regulation FD.

To account for potential industry differences in risk or investment opportunities, tests

include Fama-French 49 industry fixed effects. Time period (year-quarter) fixed effects are

included to account for granular time variation in IPO market trends that could affect

underpricing (e.g., Derrien (2005); Ivanov and Lewis (2008); Lowry et al. (2010)). Time fixed

effects override direct post-shock period effects but help demean underpricing tests of potential

market-wide confounding effects due to unobservable changes to the aggregate pool of issuers.

Explanatory variables include standard controls from prior studies of underpricing, as

well as industry and time fixed effects. To account for partial adjustment, we incorporate a

control for upward offer price revision – an increase in the offer price between the initial filing

date and the IPO pricing date – which has been found to increase underpricing (see, e.g.,

Benveniste and Spindt (1989); Hanley (1993); Lowry and Schwert (2004); Cliff and Denis

(2004); Habib and Ljungqvist (2001); Ljungqvist and Wilhelm (2003); Ritter and Welch (2002);

Aruǧaslan, Cook, and Kieschnick (2004); Loughran and McDonald (2013)). Since issuers selling

a smaller stake in the firm at IPO time (having a greater share overhang) would incur a lower

opportunity cost of underpricing, we expect the stake to be negatively related to underpricing

(e.g., Loughran and Ritter (2004); Loughran and McDonald (2013)). We also account for deal

size; length of time from announcement to offer; market returns in the month prior to the offer

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(e.g., Lowry and Murphy (2007)). Robustness tests control for additional characteristics that may

affect underpricing, including issuer age (Field and Karpoff (2002); Loughran and Ritter (2004);

Ljungqvist and Wilhelm (2003)); VC reputation (Krishnan, Ivanov, Masulis, and Singh (2011));

star analyst coverage from the underwriter (Liu and Ritter (2011); Cliff and Denis (2004));

private equity backing; and direct VC indicator effects in tests of VC/underwriter ties.

Robust standard errors are used to account for potential heteroscedasticity. We do not

cluster errors by industry and time because the main specifications already include industry and

time fixed effects (Petersen (2009)). In unreported robustness tests, clustering standard errors by

lead underwriter, industry, issuer location, and a combination of lead underwriter and time period

does not affect the main results.

Sample and variable definition details are presented in the Appendix. Summary statistics

of the main variables are reported in Table 1.

[Table 1]

4. Results

Initial univariate tests are presented in Table 2. Panel A reports t-tests of the effects of

VC backing, top underwriter presence, and their interaction on underpricing. We find that

underpricing is significantly higher for VC-backed deals, deals with a top underwriter, and deals

with a combination of VC backing and a top underwriter. Panel B reports t-tests of the effect of

the 2003 and 2012 shocks on underpricing in subsamples based on VC and top underwriter

indicators and their interaction. We find that the 2003 shock reduced underpricing in the VC-

backed subsample and in the subsample of VC-backed IPOs with a top lead underwriter.

However, the shock did not have a significant effect on the on underpricing of non-VC-backed

IPOs or on underpricing in the full sample. The 2012 shock increased underpricing in the

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subsample with a combination of VC-backing and a top underwriter (significant at 10%) but not

for other deals or the overall sample of firms. Top underwriter presence was not associated with

differences in the effects of either shock.

[Table 2]

Univariate tests do not account for potential differences in issuer characteristics that

could be correlated with the variables of interest. Table 3 reports multivariate tests. Panel A

reports the effects of VCs, underwriters, and their ties on underpricing during the full sample

period. In line with the univariate tests, VC-backed IPOs were more underpriced on average;

IPOs with VC backing and a top underwriter were more underpriced on average (significant at

10%); and the presence of VCs with stronger underwriter ties was also associated with greater

underpricing. The results support the strategic rent extraction behavior of VCs, particularly when

VCs have close ties to underwriters. The effect of top underwriters by themselves on

underpricing is insignificant. It is possible that the certification role of top underwriters offsets

their strategic incentives to underprice.

[Table 3]

Panel B examines the effects of the 2012 shock on underpricing of deals with VC

backing and top underwriters. The EGC provisions of the 2012 JOBS Act have been linked to

increased information asymmetry between issuers and investors (e.g., Chaplinsky et al. (2017)

and Barth et al. (2017)). After controlling for changes in market and industry conditions during

this period, we find that VC-backed deals, VC-backed deals with top underwriters, and deals

with close VC/underwriter ties experienced increases in underpricing after the 2012 shock. This

is consistent with VCs, in particular VCs in the presence of top underwriters and VCs with close

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ties to underwriters, extracting rents rather than providing certification after information

asymmetry increases.

Panel C examines the effects of VCs, underwriters, and their ties around the 2003 shock,

which reduced certain explicit channels for rent extraction and strategic interaction with respect

to underpricing. Consistent with the rent extraction hypothesis and the findings of univariate

tests, VC-backed IPOs, IPOs involving VC backing and a top underwriter, and IPOs involving

VCs with close underwriter ties were more underpriced on average but became less underpriced

after the 2003 shock. The results suggest that the 2003 shock weakened the strategic interaction

incentives of VCs, particularly VCs with close ties to underwriters, in the context of IPO

underpricing. However, the presence of a top underwriter by itself was not significant and the

effect did not change significantly around the 2003 shock, suggesting that strategic interaction

between top underwriters and VCs was more relevant for underpricing than the presence of a top

underwriter alone.

Panel D repeats the tests of the 2003 and 2012 shock effects in the full sample, yielding

consistent results.

Endogeneity due to nonrandom nature of VC-backing and VC/underwriter ties is a

potential source of concern. Endogeneity may be due to unobservable issuer characteristics, such

as issuer risk or uncertainty about issuer quality, that predict VC presence (e.g., Gompers

(1995)). Deals involving riskier issuers and more uncertainty about issuer quality may also be

associated with greater underpricing. In addition, endogeneity may be due to VCs and

underwriters electing to repeatedly partner on deals with high underpricing if such deals are

mutually beneficial. In either instance, the direction of causality would affect interpretation. We

17

utilize industry and time fixed effects but cannot employ firm fixed effects to address unobserved

variation in issuer characteristics because IPO issuers only appear in the sample once.

The use of a shock setting as part of the main tests helps to alleviate some of the

endogeneity concerns. The 2003 shock affected the benefits of strategic interaction with

underwriters in setting the IPO price without directly affecting issuer information risk. We

perform various robustness tests to account for the effects of changes in the analyst environment

and for SOX, which may have affected information risk of issuers in early 2000s and rule out

those explanations for the effects of the 2003 shock on underpricing of VC-backed deals with top

underwriters. Conversely, it has been argued that the 2012 shock has increased the uncertainty

about IPO issuers by enabling most issuers to disclose less information. It could have either

created greater demand for certification or alternatively, greater uncertainty could make it easier

to VC and underwriters to coordinate on underpricing because issuers recognize that greater

underpricing is expected in the presence of greater uncertainty. Other than through the effect on

information uncertainty, the 2012 shock did not affect strategic dealing incentives between VCs

and underwriters.

Further, to attempt to further address endogeneity concerns, we use two-stage least

squares, reported in Table 4. We use the density of VC firms and the amount of VC funding

invested by local VC firms in any firm in the issuer’s local area to predict the likelihood of VC

backing (motivated by Lerner (1995); Chen, Gompers, Kovner, and Lerner (2010)). Extending

the logic of other studies using distance-based instruments, we also add the density of securities

firms that are near the VC firm, either for all VC firms in the area, or for VC firms involved in

the deal, to predict VC/underwriter ties. First-stage F-statistics support the relevance of the

instruments. It is not clear that either variable would directly increase underpricing. If greater

18

density of financial institutions relates to economic vibrancy and better average quality of issuers

in the area, it might reduce underpricing. In the two-stage least squares setting, we continue to

find larger underpricing for VC-backed deals and deals in which VCs have strong underwriter

ties.

[Table 4]

For robustness, Table 5 repeats the analysis of VC effects in subsamples based on top

underwriter presence. Consistent with the prior results, the positive relation between VC backing

and underpricing, the decline in the underpricing of VC-backed IPOs after the 2003 shock, and

the increase in underpricing of VC-backed deals after the 2012 shock, were most significant in

the subset of deals involving a top underwriter.

[Table 5]

The positive effect of VC backing on underpricing, particularly in the nineties, has also

been attributed to “analyst lust” of VCs, which may cause VCs to accept greater underpricing in

exchange for star analyst coverage supplied by major underwriters that back the IPO. To the

extent that the 2003 NASD rule coincided with other regulatory developments related to analyst

research, it is important to consider whether our findings are due to the changing dynamics of

between underwriting and analyst research. By reducing conflicts of interest between investment

banking business and research coverage, Regulation AC, adopted as part of implementing SOX,

and the Global Settlement, likely limited the ability of top underwriters to provide favorable

analyst coverage to their IPO issuers, potentially reducing the incentive of VCs to accept greater

underpricing. In Panel A, we confirm that the effect of the 2003 shock remained in the subset of

deals without star analyst coverage from the underwriter. Later, in Table 8 (Panel B), we also

interact VC backing and 2003 shock effects with the presence of star analyst coverage from

19

underwriter and do not find that it subsumes the effects of the 2003 shock on the underpricing of

VC-backed deals and VC-backed deals with top underwriters. Separately, in Table 8 (Panel C),

we also examine the effects of Regulation FD, which limited selective disclosure by issuers and

has been shown to reduce private communications with analysts. Research coverage became

subject to fewer conflicts of interest after 2000-2003 and the ability of underwriters to provide

biased coverage for their issuers was limited in the 2000s compared to the 1990s. Overall, these

shifts do not appear to be driving the observed interaction effects of VCs and underwriters on

IPO pricing during our sample period.

The main test of the 2012 shock used the post-2012 shock indicator, consistent with the

vast majority of IPOs in the post-2012 period being eligible for EGC status. In Panel A of Table

6, for robustness we replace the post-2012 shock indicator with the indicator for EGC status

based on the issuer’s filings. The results continue to hold and have even greater significance,

suggesting that the 2012 shock effect was driven by deals affected by the 2012 regulatory

reform.

[Table 6]

The prior analysis defined the time of the shock as October 2003, which corresponds to

the adoption of NASD Rule 2790. For robustness we alter the definition of the 2003 shock to

allow for early or late adjustment. Panel B redefines the shock based on the time when

compliance with Rule 2790 became mandatory (March 2004). The results continue to hold.

Panel C examines April 2003, when the Voluntary Initiative was announced, which may have led

top underwriters to begin adjusting their IPO allocation practices ahead of the adoption of Rule

2790. The effects remain consistent with prior results. deals backed by VCs, VC-backed IPOs

with a top underwriter, and VC-backed IPOs with close underwriter ties become relatively less

20

underpriced after the shock. However, across all IPOs, the effects of top underwriters on

underpricing do not vary significantly with the shock.

Repeated interaction of underwriters with institutions can create incentives to underprice

deals in order to encourage institutional buyers to subscribe to the underwriter’s future IPOs. In

Table 7, we examine this effect. When we consider underwriter ties to institutional investors, we

find that they have a significant positive effect on underpricing, consistent with an incentive to

underprice deals in the presence of repeat dealing with institutional buyers. However, the effect

of institution/underwriter ties does not explain the effect of VC/underwriter ties, both of which

are separately associated with higher underpricing. In addition, unlike the prior results of VC

tests showing that the 2003 shock moderated and the 2012 shock increased the effect of

VC/underwriter ties on underpricing, respectively, the effect of institution/underwriter ties does

not exhibit a similar pattern around these shocks. The effect of the 2003 shock on the role of

institution/underwriter ties on underpricing is either not significant or positive, depending on the

specification. Even though explicit incentives stemming from preferential IPO allocations to

institutional money managers were restricted by the 2003 rule, implicit incentives from repeat

dealing—whereby the same institutions continue to invest in the underwriter’s underpriced IPO

deals, which this measure captures—remained strong in the 2000s and 2010s. Thus, this result

highlights the importance of implicit incentives to strategically underprice stemming from repeat

dealing with institutions in the context of IPO price setting.

[Table 7]

Panel A of Table 8 enhances the specifications by including additional control variables

for VC and PE backing, firm age, VC reputation, and star analyst rating. The main results

continue to hold. In Panel B we further test whether the effect of the shock on IPO underpricing

21

was due to the analyst lust channel. Specifically, we consider whether the relation between star

analyst coverage and underpricing changed after the shock, for all and for VC-backed IPOs. The

interaction between star analyst coverage and 2003 shock indicator is not significant whereas the

interaction between the VC indicator and shock indicator remains significant. The triple

interaction between VC, star analyst, and shock indicator is not significant. It appears that the

reduction in VC-backed IPO underpricing around 2003 cannot be solely explained by VC

appetite for star analyst coverage.6

[Table 8]

In Panel C, we repeat the tests comparing the effects of the 2000 Regulation FD and the

2003 NASD rule on the underpricing of VC-backed IPOs. Regulation FD restricted selective

disclosure of information by issuers, including private information disclosure to some investors

or analysts (e.g., Charoenrook and Lewis (2009); Mohanram and Sunder (2006); Findlay and

Mathew (2006)). By reducing the amount of information an issuer may selectively convey to

analysts, this change could reduce the advantage of the underwriter’s analysts in providing

coverage and impair the issuer’s ability to cultivate an analyst relationship with the underwriter.

If the VC-underwriter effect on underpricing were driven by VC preference for analyst coverage,

the effect should weaken after Regulation FD. We do not find that to be the case. When

Regulation FD is examined separately, it does not have a disproportionate effect on VC-backed

deals or VC-backed deals with top underwriters. The effect of Regulation FD on VC-backed

IPOs does not appear to go in the direction of the main finding from the 2003 shock. To compare

6 In unreported tests, we confirm a strong positive relation from prior work through 2000. After 2000, but particularly, after the

Global Settlement in 2003, the nature of assignment of star analysts to IPOs likely changed. Indeed, the incidence of star analyst coverage from the underwriter declines during the post-shock of the sample period. When assigned to an IPO stock, star analysts might cover the stock differently after the shock than before the shock. The Global Settlement likely had an aggregate, industry-wide effect on the reduction of analyst bias in research reports, which may be captured by time period fixed effects. The lack of sensitivity of underpricing to star analyst coverage in the 2000s is consistent with Bradley et al. (2015)

22

the 2000 and 2003 shocks we consider their joint effects on the underpricing of VC-backed and

top underwriter IPOs. Deals with top underwriters experience a marginal decline in underpricing

after Regulation FD (depending on the specification). Overall, it does not appear that Regulation

FD is driving the observed effect of VC-underwriter ties on IPO underpricing.

In Table 9 we perform several additional tests to validate our shocks. First, it is possible

that some confounding market or regulatory event, such as the dot-com bust or subsequent

aggregate trends in the IPO market drove a systematic shift in underpricing of VC-backed and

top underwriter IPOs. In Panel A we reassign shock timing to alternative time periods unrelated

to our shocks. We do not find the interaction of the VC indicator with the indicators based on

placebo shock definitions to be significant. Second, one of the identifying assumptions of a

differences-in-differences estimation is the parallel trends assumption: IPOs with and without

VCs and top underwriters need to exhibit parallel trends in underpricing prior to the shock. The

presence of different trends can lead to spurious estimates in differences-in-differences tests

around the shock. Panel B reports regressions of underpricing in the pre-shock periods on

controls, VC indicator, time trend, and interactions of the effects of interest with the time trend.

A significant interaction with the time trend would be of concern. We find that the interactions

with the time trend are insignificant, consistent with parallel trends.

[Table 9]

Third, some other characteristics, such as issuer risk, may be driving both VC backing

and underpricing, and this characteristic’s effect on underpricing may have changed around the

time of the shock. . To address such potential confounding, in Panel C, we repeat the tests around

the 2003 and 2012 shocks substituting the VC indicator with a placebo indicator based on the

issuer being in the high-tech industry. While high-tech deals had relatively higher underpricing

23

in some specifications (not surprising), the effects of the shocks on the underpricing of high-tech

deals are not significantly different from the effects of the shock on non-high-tech firms. These

tests alleviate the concern that our findings were merely due to a confounding shift in the

underpricing of issuers with specific characteristics that draw VCs.

Fourth, in Panel D we randomly reassign the VC indicator while preserving the same

proportion of “VC” firms as in the actual sample and repeat the underpricing tests using the

placebo VC indicator and its interaction with the shocks 10,000 times. We plot and tabulate the

percentiles of the distribution of coefficient estimates on the placebo effects and controls (the

actual specification using the true VC assignment is also reported for reference). Unsurprisingly,

between 5% and 6% of placebo coefficient estimates are significant at the 5% level, consistent

with Type I error in a random assignment scenario. Actual estimates of the VC-shock interaction

of interest fall in the 99.5% tail of the distribution of placebo estimates for the 2003 shock and

between 95% and 97.5% tail of the distribution of placebo estimates for the 2012 shock,

suggesting that actual estimates are very unlikely to arise in a random assignment scenario.

Finally, Table 10 reports additional robustness tests for the 2003 shock tests. Panel A

narrows the window to end either in 2005 or 2006, rather than 2007. Panel B considers the

potential effects of Section 404 of Sarbanes-Oxley, which has imposed requirements of

managerial reporting and auditor attestation of internal controls over financial reporting on larger

issuers. To the extent that underpricing reflects information risk and to the extent that the

anticipation of these requirements regarding internal controls over financial reporting could have

reduced information risk and agency concerns, one might expect underpricing to decline post-

SOX for issuers affected by this requirement. Although it is not clear that SOX would affect VC-

backed IPOs differently, for robustness we control for the effects of SOX or exclude affected

24

firms. The requirement was phased in for larger filers in November 2004 but not phased in for

smaller (non-accelerated) filers during the 2001-2007 period around the 2003 shock (it was

subsequently repealed for non-accelerated filers in 2010). Similar to Chaplinsky et al. (2017), we

use deal size above $75 million to proxy filer size. Repeating tests in the sample without larger

deals and in the sample without larger issuers in the post-SOX period does not affect the results.

[Table 10]

Further robustness tests are reported in the Appendix. To address potential extreme

observations, Table A1 winsorizes continuous variables.

Another potential concern is a shift in the characteristics of issuers classified in the two

groups around the shock. Although controls for key observable characteristics are included in all

specifications, dramatic differences in observable characteristics around the shock can signal a

shift in unobservable characteristics of the issuer pool around the shock. Table A2 examines this

issue. Panel A regresses explanatory variables on the VC indicator and VC-shock interactions,

controlling for industry and time fixed effects. While many of the controls do not respond

differently to the shocks, there are some differences. It could be because VC-backed deals tend

to be smaller. For robustness, to increase the comparability between the characteristics of VC

and non-VC IPOs around the shock, we repeat the analysis in a sample that excludes deals

exceeding the 95th percentile of size and stake sold of VC-backed deals (close to $250 million

and 46%, respectively). The differences in explanatory variables become less significant.

Underpricing tests continue to hold in this restricted sample, as shown in Panel B of Table A2.

Finally, Table A3 in the Appendix adds financial crisis years back to the sample. The

results continue to hold.

25

5. Conclusion

This paper has examined the role of VCs and top underwriters in the IPO process, and the

effects of their strategic interactions on IPO underpricing. Building on existing work, we

empirically tested contrasting hypotheses about their impact using quasi-natural experiments

from two regulatory shocks in the post-dot-com period. On the one hand, underwriters and VCs

are information intermediaries that build reputations with issuers and investors and certify issuer

quality, which can reduce underpricing. On the other hand, underwriters and VCs have strategic

incentives to underprice IPOs, accumulating rents from repeat dealing at a cost to issuers.

Our empirical results support the rent extraction hypothesis and are not consistent with

the certification hypothesis. In the cross-section, we find that VC-backed IPOs are more

underpriced, and the effect is most pronounced for VC-backed IPOs involving top underwriters.

Further, we find that IPO underpricing increases in the strength of repeat dealing incentives

measured by previous VC/underwriter ties. This result continues to hold in a two-stage least

squares setting using geographic instruments to predict VC backing and VC-underwriter ties.

Next, we tested the hypotheses around two quasi-natural experiments that impacted the

ability of VCs and top underwriters to extract rents in the IPO process through underpricing.

First, we found that, after the JOBS Act, increased informational asymmetries did not strengthen

the certification role of VCs and top underwriters. On the contrary, underpricing of VC-backed

IPOs involving top underwriters and stronger VC-underwriter connections increased after the

JOBS Act. The effect was concentrated among emerging growth companies most affected by the

newly reduced disclosure requirements. Second, we examined the effects of the 2003 NASD rule

prohibiting preferential IPO allocations on IPO underpricing of VC-backed, top underwriters

deals. We find that the shock to preferential allocations decreased the underpricing of VC-backed

26

IPOs, and particularly, VC-backed IPOs involving top underwriters and VCs connected to

underwriters.

We also examined other potential incentive conflicts and obtained three important results.

First, most of our results are driven by strategic interactions between VCs and underwriters, and

underwriter conflicts alone do not explain our findings. Underwriters have strong incentives to

underprice, but repeat dealing with VCs that bring in a pipeline of bankable projects is critical to

the observed IPO underpricing in deals with top underwriters.

Second, we examined the role of repeat dealing between top underwriters and large

institutions. Institutional investors buying at the offer price benefit from underpricing, and

underwriters can underprice deals to build a network of institutional buyers that will invest in

future IPO deals. We found that when underwriters engage in repeat IPO dealing with large

institutions, IPO underpricing increases, supporting the incentive conflict effect: underwriters

strategically underprice IPOs and institutions invest in IPOs backed by the underwriter.

However, we did not find that such repeated dealing between institutional investors and top

underwriters was affected by the 2003 shock to preferential IPO allocations or the 2012 shock to

information asymmetries about issuers. Thus, the effects of repeat dealing between top

underwriters and institutional buyers stem from implicit incentives for repeat business that were

not affected by the elimination of explicit incentives due to preferential IPO allocations.

We did not find that analyst coverage is a channel for VC-top underwriter interactions

during our sample period. The effects of the 2003 shock on underpricing of VC-backed deals

with top underwriters continue to hold even in the absence of coverage by the underwriter’s star

analysts. In addition, the passage of Regulation FD (a shock to analyst coverage) did not

attenuate the role of VC-underwriter interactions for IPO underpricing. While we recognize that

27

analysts may be important for IPO bargaining dynamics, the analyst channel does not appear to

be a significant mechanism behind the VC-underwriter effects in the post-dot-com period.

Our findings continued to hold after a battery of robustness and sensitivity tests,

including alternative selection criteria, additional measures, and placebo tests.

Overall, our paper sheds new light on a critical component of issuers’ cost of capital –

IPO underpricing. Our results suggest that VCs and top underwriters jointly extract rents by

underpricing IPO issues, particularly when repeat dealing is significant. The effects are stronger

after regulatory shocks that impacted their ability to extract rents related to IPO pricing.

Moreover, repeated dealing between underwriters and institutional investors increases

underpricing, but the effect is likely driven by implicit business incentives and not explicit

preferential allocations. This evidence sheds new light on VC-backed deals, the role of

information asymmetries about issuers in the IPO process, and incentives stemming from repeat

interactions between VCs and top underwriters.

28

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31

Table 1. Summary statistics

Sample and variable definitions are presented in the Appendix.

Full sample

(2001-2016, excluding the financial crisis) Obs. Mean Median SD

Underpricing 1439 14.95 8.38 24.19

VC-backed 1439 0.41 0.00 0.49

Top underwriter 1439 0.78 1.00 0.42

VC-backed x Top underwriter 1439 0.33 0.00 0.47

VC/underwriter ties 1301 1.01 0.00 1.51

VC/underwriter ties (no log) 1301 10.19 0.00 26.10

Institution/underwriter ties 1371 2.33 2.70 1.07

Institution/underwriter ties (no log) 1371 14.30 13.85 10.64

D(Revision>0) 1439 0.40 0.00 0.49

Revision 1439 5.77 0.00 10.27

Stake 1439 30.48 28.30 13.56

Size 1439 18.52 18.40 0.99

Size (no log) 1439 216.33 98.00 595.53

Time to offer 1439 4.48 4.52 0.63

Time to offer (no log) 1439 106.20 91.00 69.69

Industry return 1439 0.02 0.02 0.05

Internet-related 1439 0.12 0.00 0.33

2003 shock sample

(2001-2007) Obs. Mean Median SD

Underpricing 731 12.73 8.38 19.06

VC-backed 731 0.32 0.00 0.47







D(Revision>0) 731 0.41 0.00 0.49

Revision 731 5.74 0.00 9.97

Stake 731 33.35 30.19 14.84

Size 731 18.47 18.36 1.00

Size (no log) 731 204.33 93.80 482.24

Time to offer 731 4.69 4.63 0.46




2012 shock sample

(2010-2016) Obs. Mean Median SD

Underpricing 708 17.24 8.39 28.37

VC-backed 708 0.51 1.00 0.50






32


D(Revision>0) 708 0.38 0.00 0.49

Revision 708 5.80 0.00 10.58

Stake 708 27.51 26.23 11.36

Size 708 18.58 18.43 0.97

Size (no log) 708 228.71 100.85 693.49

Time to offer 708 4.26 4.22 0.71




33

Table 2. Univariate tests Sample and variable definitions are presented in the Appendix. Panel A reports univariate t-tests of differences in underpricing between pre- and post-shock periods for subsamples based on the VC backing indicator, top underwriter indicator, and interaction of the two. Panel B reports univariate t-tests of differences in underpricing in the full sample comparing issuers with and without VC backing, with and without a top underwriter, and with and without a combination of VC backing and top underwriter.

Panel A: Effects of VC backing and top underwriter presence on underpricing

Full sample Avg.

underpricing Group: yes

Avg. underpricing

Group: no Diff.

VC-backed 19.54 11.70 7.85 ***

Top underwriter 16.72 8.74 7.99 ***

VC-backed with top underwriter 22.51 11.27 11.24 ***

Panel B: Effects of the 2003 and 2012 shocks on underpricing in the full sample and in subsamples based on VC backing and top underwriter presence

Subsample Post-2003 shock avg.

underpricing

Pre-2003 shock avg.

underpricing Diff.

Post-2012 shock avg.

underpricing

Pre-2012 shock avg.

underpricing Diff.

All 12.42 14.11 -1.68

18.15 14.44 3.70

VC-backed 12.95 23.95 -11.00 *** 23.70 19.21 4.49

Not VC-backed 12.17 9.56 2.61

12.55 8.84 3.71

Top underwriter 13.60 14.74 -1.13

20.71 16.45 4.25

No top underwriter 9.02 10.55 -1.53

9.31 3.01 6.30

VC-backed with top underwriter

14.06 25.69 -11.63 *** 28.46 20.78 7.68 *

Not VC-backed / no top underwriter

11.91 9.81 2.10

11.57 8.53 3.04

34

Table 3. Multivariate tests

This table reports regressions of underpricing. The intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicator are included but not reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized. Panels A and D use the 2001-2016 period (excluding the financial crisis). Panel B uses the 2010-2016 period. Panel C uses the 2001-2007 period.

Panel A: Full sample

Dep. var.: Underpricing I

II

III

VC-backed 5.836 *** 2.554

4.33

1.22

VC-backed x Top underwriter

4.361 *

1.72

VC/underwriter ties

2.104 ***

4.15

Top underwriter 2.175

0.184

1.63

0.11

Revision 1.308 *** 1.298 *** 1.299 ***

10.44

10.38

10.18

Stake -0.062 * -0.062 * -0.076 **

-1.67

-1.67

-2.00

Size -0.166

0.083

0.180

-0.27

0.13

0.30

Time to offer -1.662

-1.499

-1.649

-1.57

-1.43

-1.48

Industry return 20.641 * 21.276 * 17.640

1.80

1.86

1.36

Internet-related -0.175

-0.280

-0.887

-0.09

-0.14

-0.41

Obs. 1439

1439

1301

R2 0.43

0.43

0.45

Adj. R2 0.39

0.39

0.40

35

Panel B: 2012 shock


II

III

VC-backed 0.302

0.465

0.10

0.13

VC-backed x Post-2012 shock 5.908 *

1.92


1.270

0.29

VC-backed x Top underwriter x Post-2012 shock

6.634 **

1.99

VC/underwriter ties

-1.992

-1.55

VC/underwriter ties x Post-2012 shock

4.062 ***

2.96

Top underwriter x Post-2012 shock -1.263

-0.34


-1.586

1.03

-0.49

Revision 1.755 *** 1.735 *** 1.780 ***

12.05

12.04

11.46

Stake -0.090

-0.084

-0.127

-1.11

-1.05

-1.42

Size -1.094

-0.631

-1.100

-1.11

-0.59

-1.13


-0.652

-0.893

-0.66

-0.44

-0.54

Industry return 32.738 * 31.914 * 33.834

1.75

1.71

1.54

Internet-related 1.792

1.492

2.339

0.59

0.50

0.70

Obs. 708

708

612

R2 0.53

0.53

0.55

Adj. R2 0.47

0.47

0.49

36

Panel C: 2003 shock


II

III

VC-backed 14.879 *** 4.698 *

4.67

1.89

VC-backed x Post-2003 shock -11.323 ***

-3.15


10.272 **

2.37

VC-backed x Top underwriter x Post-2003

-11.313 ***

-2.94

VC/underwriter ties

5.761 ***

3.68


-4.235 **

-2.53


1.632

0.52

0.92

Top underwriter x Post-2003 shock 0.401

0.14

Revision 0.945 *** 0.946 *** 0.924 ***

6.83

6.84

6.54

Stake -0.090 ** -0.086 ** -0.092 **

-2.15

-2.07

-2.11

Size 0.663

0.644

1.079

0.89

0.84

1.51


-0.351

-0.277

-0.38

-0.30

-0.23

Industry return 19.262

19.640

17.027

1.41

1.43

1.16


-0.134

-1.249

0.04

-0.05

-0.45

Obs. 731

731

689

R2 0.41

0.41

0.41

Adj. R2 0.33

0.33

0.34

37

Panel D: 2003 and 2012 shocks


II

III

VC-backed 15.072 *** 2.928

4.26

1.39


-3.37

VC-backed x Post-2012 shock 6.209 ***

2.67


12.546 ***

2.86


-12.858 ***

-3.17


7.811 ***

2.90

VC/underwriter ties

5.713 ***

3.32


-5.217 ***

-2.89


2.286 ***

2.75

Top underwriter x Post-2003 shock -0.014

-0.01


0.34


0.321

0.71

0.19

Revision 1.305 *** 1.297 *** 1.297 ***

10.43

10.44

10.19

Stake -0.076 ** -0.070 * -0.084 **

-1.99

-1.88

-2.21

Size -0.083

0.121

0.275

-0.14

0.19

0.46


-1.196

-1.514

-1.43

-1.15

-1.36

Industry return 21.238 * 21.471 * 18.201

1.87

1.90

1.43


-0.496

-0.908

-0.06

-0.25

-0.42

Obs. 1439

1439

1301

R2 0.44

0.44

0.45

Adj. R2 0.39

0.39

0.40

38

Table 4. Two-stage least squares

This table reports regressions of underpricing using two-stage least squares during the 2001-2016 period (excluding the financial crisis). The intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicator are included but not reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.


II

III

IV

VC-backed 23.257 ** 19.497 **

2.13

2.16

VC/underwriter ties

3.567 *** 7.148 ***

2.99

2.58

Revision 1.225 *** 1.243 *** 1.266 *** 1.201 ***

10.03

10.31

10.63

9.96

Stake -0.064 * -0.066 * -0.067 * -0.048

-1.70

-1.81

-1.80

-1.23

Size 1.470

1.212

0.282

0.471

1.53

1.43

0.48

0.74


-0.885

-1.232

-0.132

-0.55

-0.78

-1.16

-0.10

Industry return 19.545 * 19.702 * 19.836

21.119 *

1.74

1.78

1.63

1.69


-2.544

-2.006

-4.927

-1.18

-1.03

-0.88

-1.62

First-stage:

Revision 0.005 *** 0.004 *** 0.017 *** 0.017 ***

3.78

3.70

4.16

3.78

Stake -4.9E-04

-4.9E-04

-0.005 ** -0.005 **

-0.67

-0.67

-2.46

-2.29

Size -0.073 *** -0.072 *** -0.023

-0.066 *

-6.11

-6.13

-0.70

-1.70

Industry return -0.060 *** -0.059 *** -0.292 *** -0.315 ***

-2.91

-2.86

-4.39

-4.32

Time to offer 0.038

0.056

-0.319

-0.398

0.16

0.24

-0.41

-0.48

Internet-related 0.163 *** 0.162 *** 0.660 *** 0.772 ***

3.95

3.94

4.48

4.87

Instruments:

# local VCs 0.028 ***

0.089 *** 0.133 ***

4.32

4.80

4.84

# deals local VCs

0.024 ***

5.13

deal VCs' proximity to UW

0.386 ***

12.42

local VCs' proximity to UW

-0.049

-1.31

Obs. 1439

1439

1297

1297

R2 0.37

0.39

0.44

0.39

Adj. R2 0.31

0.34

0.39

0.34

First stage F-statistic 18.68

26.30

98.02

14.74

39

Table 5. Analysis within subsamples

This table reports regressions of underpricing within subsamples based on the presence of a top underwriter and star analyst coverage from underwriter. The intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicator are included but not reported in the table. Panel A uses the 2001-2007 period. Panel B uses the 2010-2016 period. Panel C uses the 2001-2016 period (excluding the financial crisis). Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Panel A: 2003 shock

Subsample:

Top underwriter

Top underwriter

Not a top underwriter


No star analyst from underwriter

No star analyst from underwriter

Star analyst from underwriter

Star analyst from underwriter

Dep. var.: Underpricing I II III

IV

V

VI

VII

VIII

VC-backed 15.034 *** 14.568 **

20.638 ***

-4.848

4.21 2.10

4.84

-1.10

VC-backed x Post-2003 shock

-11.776 *** -9.374

-18.083 ***

2.603

-2.94 -1.21

-3.72

0.51

VC/underwriter ties 5.139 ***

11.980 *

7.646 ***

-2.349

3.10

1.76

3.79

-1.22


-3.660 **

-9.862

-6.589 ***

1.442

-2.07

-1.37

-3.02

0.70

Revision 0.964 *** 0.939 *** 0.840 *** 0.817 *** 1.025 *** 1.018 *** 1.448 *** 1.466 ***

6.32 6.09 3.23

3.18

6.96

6.79

6.25

5.88

Stake -0.091 * -0.093 * 0.052

0.061

-0.102

-0.085

0.004

0.029

-1.82 -1.81 0.57

0.66

-1.57

-1.27

0.07

0.46

Size 0.361 0.424 1.952

2.599

0.738

0.499

-0.859

-0.478

0.42 0.49 1.02

1.39

0.70

0.48

-0.54

-0.27

Time to offer -0.529 -0.727 -2.376

-3.268

-1.482

-1.372

-0.132

0.376

-0.38 -0.49 -1.12

-1.52

-0.88

-0.81

-0.04

0.13

Industry return 17.420 15.151 20.084

7.662

12.655

9.251

47.313 ** 38.712

1.07 0.88 0.71

0.27

0.66

0.46

2.02

1.63

Internet-related -0.981 -2.891 2.278

3.783

3.700

2.546

-4.063

-4.740

-0.29 -0.83 0.50

0.85

1.10

0.73

-0.84

-0.97

Obs. 557 529 174

160

510

483

148

136

R2 0.43 0.43 0.53

0.55

0.44

0.45

0.74

0.75

Adj. R2 0.34 0.34 0.23

0.27

0.34

0.35

0.52

0.51

40

Panel B: 2012 shock

Subsample:

Top underwriter

Top

underwriter


Not a top

underwriter


II

III IV

VC-backed -0.574

2.328

-0.17

0.27

VC-backed x Post-2012 shock 8.694 **

-0.332

2.39

-0.04

VC/underwriter ties

-2.658 * -0.254

-1.66

-0.08


4.928 *** 1.787

2.99

0.49

Revision 1.727 *** 1.750 *** 2.788 *** 2.777 ***

11.53

10.84

4.85 4.82

Stake -0.225 ** -0.249 * 0.185 0.058

-2.09

-1.86

1.35 0.54

Size -1.774

-2.039

-0.102 0.281

-1.51

-1.57

-0.03 0.08

Time to offer 1.107

0.890

-2.853 -1.471

0.63

0.45

-0.78 -0.36

Industry return 42.230 * 52.307 * -11.225 -11.945

1.83

1.88

-0.23 -0.21


2.157

4.774 9.499

0.37

0.61

0.53 0.87

Obs. 562

482

146 130

R2 0.55

0.56

0.61 0.68

Adj. R2 0.48

0.48

0.36 0.43

Panel C: Full sample Subsample:

Top underwriter

Top

underwriter


Not a top

underwriter


II

III

IV

VC-backed 6.541 ***

3.409

3.83

1.29

VC/underwriter ties

2.188 ***

1.345

3.70

1.04

Revision 1.308 *** 1.300 *** 1.289 *** 1.279 ***

9.61

9.41

4.19

4.15

Stake -0.095 ** -0.098 ** 0.058

0.021

-2.10

-2.03

0.61

0.21

Size -0.304

-0.305

1.231

1.305

-0.43

-0.41

0.77

0.75


-1.386

-3.004

-3.076

-0.89

-1.04

-1.42

-1.31


19.817

3.863

-1.331

1.50

1.26

0.16

-0.05


-1.970

2.781

4.172

-0.43

-0.76

0.69

1.00

Obs. 1119

1011

320

290

R2 0.45

0.46

0.43

0.46

Adj. R2 0.39

0.40

0.19

0.22

41

Table 6. Alternative shock definitions

This table reports regressions of underpricing using alternative shocks. Panel A uses the 2010-2016 period and replaces the 2012 shock indicator with the EGC status indicator. Panel B uses the 2001-2007 period and defines the shock using the mandatory compliance date of NASD Rule 2790 (March 2004). Panel C uses the 2001-2007 period and defines the shock using the Voluntary Initiative announcement (April 2003). The intercept, Fama-French 49 industry fixed effects, time fixed effects, and the post-shock indicators are included but not reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Panel A: EGC indicator


II

III

VC-backed 0.368

0.707

0.12

0.20

VC-backed x EGC 6.268 **

1.97


1.212

0.27

VC-backed x Top underwriter x EGC

6.913 **

2.01

VC/underwriter ties

-1.621

-1.20

VC/underwriter ties x EGC

3.878 ***

2.73

EGC -2.503

-3.556

-3.552

-0.54

-1.08

-1.00

Top underwriter x EGC -1.414

-0.38


-1.621

1.08

-0.50

Revision 1.769 *** 1.748 *** 1.792 ***

11.80

11.79

11.10

Stake -0.081

-0.076

-0.115

-1.00

-0.94

-1.28

Size -1.580

-1.029

-1.351

-1.43

-0.87

-1.29


-1.124

-1.413

-0.95

-0.71

-0.82

Industry return 33.016 * 32.147 * 34.377

1.76

1.72

1.56


1.710

2.746

0.67

0.57

0.81

Obs. 708

708

612

R2 0.53

0.53

0.55

Adj. R2 0.47

0.47

0.49

42

Panel B: Effective date of NASD Rule 2790


II

III

VC-backed 11.790 *** 4.639 *

3.88

1.86

VC-backed x Post-2003 shock (effective) -7.955 **

-2.31


6.919 *

1.65

VC-backed x Top underwriter x Post-2003 (effective)

-7.467 **

-1.98

VC/underwriter ties

4.455 ***

3.11

VC/underwriter ties x Post-2003 shock (effective)

-2.842 *

-1.83

Top underwriter x Post-2003 shock (effective) 1.428

0.55


1.605

0.25

0.91

Revision 0.948 *** 0.947 *** 0.928 ***

6.81

6.82

6.55

Stake -0.087 ** -0.085 ** -0.090 **

-2.06

-2.03

-2.09

Size 0.575

0.570

0.998

0.77

0.74

1.40


-0.217

-0.117

-0.25

-0.19

-0.10


19.660

17.275

1.40

1.42

1.16


-0.306

-1.238

-0.03

-0.11

-0.45

Obs. 731

731

689

R2 0.40

0.40

0.41

Adj. R2 0.33

0.33

0.33

43

Panel C: 2003 shock (April)


II

III

VC-backed 16.06 *** 4.66 *

4.60

1.88

VC-backed x Post-2003 shock (April) -12.50 ***

-3.22


11.50 **

2.52

VC-backed x Top underwriter x Post-2003 shock (April)

-12.59 ***

-3.04

VC/underwriter ties

6.54 ***

3.81

VC/underwriter ties x Post-2003 shock (April)

-5.03 ***

-2.75

Top underwriter x Post-2003 shock (April) 0.68

0.21


1.71

0.36

0.97

Revision 0.95 *** 0.95 *** 0.93 ***

6.87

6.87

6.58

Stake -0.09 ** -0.08 ** -0.09 **

-2.14

-2.03

-2.10

Size 0.67

0.62

1.11

0.90

0.81

1.56

Time to offer -0.45

-0.33

-0.34

-0.39

-0.28

-0.28


18.54

16.00

1.35

1.36

1.10


0.03

-0.93

0.09

0.01

-0.34

Obs. 731

731

689

R2 0.41

0.41

0.41

Adj. R2 0.33

0.33

0.34

44

Table 7. Institution/underwriter ties

This table reports regressions of underpricing on institution/underwriter ties. Columns I, II, and V use the 2001-2016 period

(excluding the financial crisis). Column III uses the 2001-2007 period. Columns IV and VI use the 2010-2016 period. The

intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicators are included but not

reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors

are italicized.

Dep. var.: Underpricing I II III IV V VI

Institution/underwriter ties 1.714 *** 1.331 ** -0.852 5.032 *** -1.129 3.148 **

3.14 2.01 -0.79 3.22 -0.99 2.48

Institution/underwriter ties x Post-2003

1.713 2.573 **

1.44 2.06

Institution/underwriter ties x Post-2012 shock

-2.592 1.399

-1.49 1.28

Institution/underwriter ties x EGC

-0.371

-0.23

EGC -1.358

-0.26


3.78

Top underwriter -0.345

-0.21

Revision 1.336 *** 1.299 *** 0.963 *** 1.793 *** 1.340 *** 1.799 ***

10.47 10.22 6.74 11.74 10.52 11.49

Stake -0.067 * -0.065 * -0.094 ** -0.086 -0.066 * -0.079

-1.79 -1.67 -2.21 -0.99 -1.79 -0.91

Size -0.869 -0.377 0.098 -1.851 * -0.826 -2.188 *

-1.42 -0.57 0.12 -1.96 -1.36 -1.91

Time to offer -2.265 ** -1.583 0.183 -1.764 -2.130 * -2.071

-2.02 -1.42 0.15 -1.09 -1.92 -1.19

Industry return 19.690 17.332 19.418 39.164 * 20.725 * 39.990 *

1.59 1.34 1.35 1.80 1.68 1.84

Internet-related 1.100 -0.659 0.085 3.668 0.850 3.502

0.53 -0.31 0.03 1.11 0.41 1.07

Obs. 1371 1301 731 640 1371 640

R2 0.43 0.45 0.39 0.54 0.43 0.54

Adj. R2 0.38 0.40 0.31 0.47 0.38 0.47

45

Table 8. Additional controls

This table reports regressions of underpricing with additional controls. Panel A uses the 2001-2016 period (excluding the financial crisis). Panel B uses the 2001-2007 period. Panel C considers the effects of Regulation FD using the 1998-2002 and 1998-2007 periods, as specified. The intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicator are included but not reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Panel A: Additional controls

Dep. var.: Underpricing I II III IV

VC-backed 2.299 2.760 2.374

0.89 1.22 1.04

VC-backed x Top underwriter 5.690 ** 5.308 *

2.11 1.94

VC/underwriter ties 1.827 ** 2.252 ***

2.13 3.19

Top underwriter 1.361 -0.534 1.359 -0.454

0.90 -0.30 0.89 -0.25

Revision 1.297 *** 1.293 *** 1.297 *** 1.290 ***

9.82 9.95 9.82 9.94

Stake -0.067 -0.058 -0.066 -0.055

-1.58 -1.43 -1.53 -1.35

Size -0.220 0.069 -0.297 0.006

-0.29 0.10 -0.39 0.01

Time to offer -1.563 -1.530 -1.538 -1.482

-1.32 -1.38 -1.31 -1.34

Industry return 18.037 17.732 18.372 18.107

1.32 1.49 1.34 1.52

Internet-related -0.373 0.683 -0.487 0.495

-0.16 0.32 -0.21 0.23

Age 0.285 0.095 0.238 0.115

0.36 0.13 0.30 0.15

VC reputation 0.527 2.110

0.18 0.92

PE-backed 1.596 1.902 1.276 1.919

1.21 1.48 0.97 1.50

Obs. 1230 1357 1230 1357

R2 0.45 0.44 0.45 0.44

Adj. R2 0.39 0.39 0.39 0.39

46

Panel B: Controlling for star analyst coverage


II

VC-backed 2.908

1.088

0.98

0.30

VC-backed x Top underwriter 15.714 ***

2.90

VC-backed x Top underwriter x Post-2003 -15.838 ***

-3.31

Star analyst 5.833

4.866

1.59

1.33

VC-backed x Star analyst -12.326

-0.460

-1.65

-0.04

Star analyst x Post-2003 shock -4.562

-3.771

-1.17

-0.98

VC-backed x Star analyst x Post-2003 shock 10.160

0.293

1.25

0.02

VC/underwriter ties

6.026 ***

2.80


-5.381 ***

-2.74


0.367

0.22

0.21

Revision 1.078 *** 1.060 ***

8.08

7.74

Stake -0.081 * -0.077

-1.69

-1.56

Size -0.083

0.086

-0.09

0.09


-0.605

-0.27

-0.44


6.571

0.75

0.44


1.244

0.60

0.41

Obs. 658

619

R2 0.43

0.44

Adj. R2 0.35

0.35

47

Panel C: Controlling for Regulation FD

1998-2002 1998-2002 1998-2007 1998-2007


II

III

IV

VC-backed -1.928

7.262

0.643

4.576

-0.32

0.85

0.12

0.95

VC-backed x Post-FD 10.335

9.851

1.46

1.53


-13.728 ***

-3.00


-10.666

-4.231

-0.98

-0.60

VC-backed x Top underwriter x Post-FD

7.153

6.862

1.01

1.08


-12.419 **

-2.54

Top underwriter x Post-FD -9.653

-10.437 *

-1.39

-1.69

Top underwriter x Post-2003 shock

4.640

1.26


11.642

6.376

5.830

1.07

1.46

1.13

1.52

Revision 1.776 *** 1.785 *** 1.749 *** 1.757 ***

10.84

10.89

11.70

11.72

Stake -0.457 *** -0.450 *** -0.313 *** -0.306 ***

-3.70

-3.60

-4.23

-4.09

Size -4.568 ** -5.084 ** -2.321 * -2.659 *

-2.06

-2.20

-1.67

-1.83

Time to offer -10.699 *** -10.782 *** -6.965 *** -7.181 ***

-2.99

-3.02

-3.01

-3.08


10.576

12.354

12.693

0.37

0.39

0.53

0.54

Internet-related 11.863 * 11.646 * 9.600 ** 9.510 *

1.82

1.79

1.96

1.95

Obs. 1072

1072

1689

1689

R2 0.51

0.51

0.53

0.53

Adj. R2 0.47

0.47

0.50

0.50

48

Table 9. Placebo tests

Panel A uses placebo shocks defined at alternative points in time. Columns I-VIII use the 1998-2016 period (excluding the financial crisis) and Columns IX-XII use the 2010-2016 period. Panel B considers interactions with the time trend in the pre-shock period. Columns I-III use the pre-2003 shock portion of the 2001-2007 period and Columns IV-VI consider the pre-2012 shock portion of the 2001-2016 period (excluding the financial crisis). Panel C uses the high-tech indicator instead of VC backing. Columns I-II use the 2001-2017 period and Columns III-IV use the 2010-2016 period. Panel D reports the distribution of coefficient estimates from 10,000 regressions using placebo VC assignments determined randomly (with the incidence of the placebo assignment based on sample means during 2001-2007 and 2010-2016, respectively). Estimates using the actual VC assignment are reported for comparison. The intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicator (in Panels A, C-D) are included but not reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Panel A: Shifting shock timing

Placebo shock: January 2002 January 2001 September 2000


II

III

IV

V

VI

VC-backed 2.040

4.702

0.587

4.490

1.501

4.690

0.40

0.98

0.11

0.93

0.26

0.98

VC-backed x Placebo shock -4.681

-0.959

-2.987

-1.01

-0.19

-0.56


-3.534

-4.294

-3.071

-0.52

-0.62

-0.43

VC-backed x Top underwriter x Placebo shock

-5.651

-2.391

-5.668

-1.27

-0.51

-1.13

Top underwriter x Placebo shock -4.867

-5.860

-7.236

-0.93

-1.08

-1.28


5.797

6.106

5.662

6.983

5.740

1.02

1.52

1.10

1.48

1.21

1.50

Revision 1.749 *** 1.755 *** 1.750 *** 1.757 *** 1.749 *** 1.755 ***

11.72

11.74

11.72

11.74

11.72

11.72

Stake -0.311 *** -0.306 *** -0.311 *** -0.307 *** -0.312 *** -0.307 ***

-4.22

-4.10

-4.22

-4.12

-4.23

-4.12

Size -2.447 * -2.725 * -2.414 * -2.714 * -2.438 * -2.757 *

-1.76

-1.88

-1.74

-1.88

-1.76

-1.91

Time to offer -6.755 *** -7.016 *** -6.790 *** -7.019 *** -6.641 *** -6.934 ***

-2.92

-3.02

-2.93

-3.02

-2.87

-2.99


12.874

12.489

12.822

13.414

13.760

0.55

0.55

0.53

0.55

0.57

0.58

Internet-related 9.401 * 9.421 * 9.437 * 9.449 * 9.401 * 9.395 *

1.94

1.94

1.94

1.94

1.92

1.93

Obs. 1689

1689

1689

1689

1689

1689

R2 0.53

0.53

0.53

0.53

0.53

0.53

Adj. R2 0.50

0.50

0.50

0.50

0.50

0.50

(continued): January 2000 January 2014 January 2015

VII

VIII

IX

X

XI

XII

VC-backed -3.108

4.302

3.185

0.355

2.822

0.294

-0.51

0.89

1.21

0.10

1.29

0.08

VC-backed x Placebo shock 5.738

3.043

7.138

0.97

0.97

1.59


-5.805

3.396

4.183

-0.76

0.78

1.00

VC-backed x Top underwriter x Placebo shock

1.482

5.452

7.557

0.25

1.53

1.45

49

Top underwriter x Placebo shock -8.877

0.655

2.025

-1.39

0.17

0.46


5.562

1.771

-1.641

1.813

-1.202

1.39

1.46

0.61

-0.51

0.67

-0.38

Revision 1.755 *** 1.759 *** 1.752 *** 1.734 *** 1.755 *** 1.738 ***

11.80

11.78

12.04

12.09

12.04

12.06

Stake -0.317 *** -0.308 *** -0.088

-0.084

-0.095

-0.079

-4.27

-4.15

-1.09

-1.05

-1.15

-0.99

Size -2.301 * -2.646 * -1.095

-0.655

-1.236

-0.767

-1.65

-1.83

-1.12

-0.62

-1.26

-0.73

Time to offer -6.929 *** -7.089 *** -1.220

-0.936

-1.211

-0.931

-2.99

-3.05

-0.81

-0.63

-0.82

-0.63


12.845

32.880 * 33.472 * 36.042 * 36.359 *

0.53

0.55

1.77

1.80

1.82

1.89

Internet-related 9.714 ** 9.616 * 1.943

1.842

2.323

2.166

1.98

1.96

0.64

0.61

0.77

0.72

Obs. 1689

1689

708

708

708

708

R2 0.53

0.53

0.53

0.53

0.53

0.53

Adj. R2 0.50

0.50

0.47

0.47

0.47

0.47

Panel B: Interaction with the time trend pre-shock (evaluating pre-shock trends in underpricing)

Sample: Pre-2003

shock Pre-2003

shock Pre-2003

shock Pre-2012

shock Pre-2012

shock Pre-2012

shock


VC-backed 70.165

11.833

10.349

8.875

2.997

5.114 **

1.53

1.55

1.21

1.29

0.98

2.23

VC-backed x Time trend -5.018

-0.188

-1.32

-0.44


43.056

3.858

0.80

0.51

VC-backed x Top underwriter x Time trend

-3.617

-0.175

-0.82

-0.40

VC/underwriter ties

11.654

5.250

0.54

1.59

VC/underwriter ties x Time trend

-0.818

-0.253

-0.44

-1.28

Top underwriter x Time trend 1.346

0.106

0.22

0.27


0.291

1.710

0.911

1.949

2.159

-0.19

0.07

0.38

0.14

1.30

1.25

Revision 0.340

0.234

0.347

0.906 *** 0.891 *** 0.903 ***

1.49

1.09

1.54

6.60

6.35

6.59

Stake -0.103

-0.168

-0.093

-0.083 ** -0.088 ** -0.085 **

-0.99

-1.57

-0.90

-2.12

-2.07

-2.17

Size 1.160

3.485 * 0.805

0.228

0.542

0.278

0.62

1.93

0.47

0.31

0.66

0.36


-4.114

-3.043

-0.626

-0.956

-0.595

-1.01

-1.08

-0.91

-0.59

-0.81

-0.56


33.327

26.295

16.261

14.748

16.459

1.17

1.26

1.19

1.38

1.09

1.39


-6.114

-3.835

-1.170

-2.336

-1.159

-0.37

-0.70

-0.43

-0.50

-0.93

-0.50

Obs. 133

122

133

905

787

905

R2 0.54

0.58

0.54

0.40

0.42

0.40

Adj. R2 0.26

0.28

0.25

0.34

0.35

0.34

50

Panel C: Placebo assignment (high-tech indicator)

2001-2007 2001-2007 2010-2016 2010-2016


II

III

IV

High-tech 11.024 ** 4.706

2.532

2.208

2.41

1.12

0.51

0.40

High-tech x Post 2003 shock -5.260

-1.46

High-tech x Post 2012 shock

4.039

1.25

High-tech x Top underwriter

7.226 *

0.061

1.66

0.01

High-tech x Top underwriter x Post-2003 shock

-4.881

-1.28

High-tech x Top underwriter x Post-2012 shock

4.841

1.40


0.21


-1.016

-0.26


0.836

3.503

0.076

0.55

0.46

1.05

0.02

Revision 0.947 *** 0.940 *** 1.776 *** 1.770 ***

6.68

6.61

12.22

12.27

Stake -0.087 ** -0.089 ** -0.086

-0.084

-2.02

-2.07

-1.06

-1.04

Size 0.143

0.251

-1.395

-1.244

0.19

0.34

-1.48

-1.29


0.137

-1.583

-1.370

-0.01

0.11

-1.06

-0.91


22.854

32.412 * 31.926 *

1.58

1.60

1.74

1.71


0.071

3.149

3.165

0.05

0.03

1.01

1.02

Obs. 731

731

708

708

R2 0.39

0.39

0.53

0.53

Adj. R2 0.31

0.32

0.47

0.47

51

Panel D: Placebo assignment (randomized VC assignment)

Actual assignment:

2001-2007

2010-2016


II

VC-backed 14.855 *** 0.429

4.69

0.15


-3.11


5.806 *

1.86


2.200

1.15

0.95

Revision 0.962 *** 1.755 ***

7.20

12.05

Stake -0.090 ** -0.090

-2.17

-1.12

Size 0.833

-1.094

1.06

-1.11


-0.988

-0.41

-0.66


32.438 *

1.50

1.74


1.781

0.05

0.59

Obs. 731

708

R2 0.42

0.53

Adj. R2 0.35

0.47

Distribution of coefficients of interest with randomized VC assignment Sample 2001-2007 2001-2007 2010-2016 2010-2016

Percentile Placebo VC-backed

Placebo VC-backed x

Post-2003 shock Placebo VC-backed

Placebo VC-backed x

Post-2012 shock

0.5 -8.60 -9.22 -6.73 -8.11

2.5 -6.61 -6.96 -5.07 -6.27

5.0 -5.53 -5.86 -4.28 -5.31

10.0 -4.29 -4.56 -3.29 -4.15

25.0 -2.28 -2.41 -1.77 -2.22

50.0 -0.01 -0.03 0.02 -0.01

75.0 2.23 2.48 1.78 2.23

90.0 4.20 4.70 3.26 4.16

95.0 5.35 5.96 4.14 5.33

97.5 6.36 7.13 4.92 6.29

99.5 8.42 9.59 6.51 8.37

% p-value ≤5% 0.06 0.06 0.06 0.05

53

Table 10. Additional robustness checks

Panel A uses a shorter window around the 2003 shock. Columns I-III use the 2001-2005 period and Columns IV-VI use the 2001-2006 period. Panel B uses the 2001-2007 period and either excludes or controls for deals affected by SOX Section 404: Columns I-III exclude deals over $75 million (“large” deals) after SOX (November 15, 2004); Columns IV-VI exclude large deals; and Columns VII-IX control for large deal indicator, SOX indicator, and interaction between the two. The intercept, Fama-French 49 industry fixed effects, time period fixed effects, and the post-shock indicator are included but not reported in the table. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Panel A: Alternative sample periods in 2003 shock tests

Sample: 2001-2005 2001-2005 2001-2005 2001-2006 2001-2006 2001-2006


VC-backed 12.486 *** 5.139 13.015 *** 5.317 **

4.04 1.49 4.16 2.02

VC-backed x Post-2003 shock -12.825 *** -10.533 ***

-3.25 -2.87

VC-backed x Top underwriter 7.275 7.347 *

1.52 1.69

VC-backed x Top underwriter x Post-2003 shock -13.899 *** -10.611 ***

-3.31 -2.69

VC/underwriter ties 5.107 *** 5.067 ***

3.32 3.28

VC/underwriter ties x Post-2003 shock -5.886 *** -4.016 **

-3.27 -2.32

Top underwriter x Post-2003 shock -0.275 1.609

-0.08 0.53

Top underwriter 3.122 4.194 ** 1.711 3.797 **

1.07 1.98 0.62 2.09

Revision 0.700 *** 0.702 *** 0.677 *** 0.858 *** 0.861 *** 0.841 ***

4.67 4.68 4.36 6.34 6.35 5.96

Stake -0.087 * -0.079 * -0.097 ** -0.107 ** -0.101 ** -0.118 ***

-1.96 -1.78 -2.16 -2.45 -2.31 -2.60

Size 0.087 -0.057 1.062 0.280 0.167 1.109

0.11 -0.07 1.36 0.38 0.22 1.51

Time to offer 0.102 0.110 0.325 -0.132 -0.094 0.135

0.07 0.07 0.20 -0.10 -0.07 0.10

Industry return 20.397 19.673 17.004 16.683 16.842 14.208

1.38 1.32 1.09 1.19 1.20 0.94

Internet-related 0.905 0.477 -1.273 0.109 -0.177 -1.871

0.30 0.16 -0.43 0.04 -0.07 -0.70

Obs. 461 461 430 600 600 563

R2 0.38 0.38 0.40 0.41 0.41 0.41

Adj. R2 0.26 0.26 0.28 0.32 0.32 0.32

54

Panel B: Controlling for SOX effects in 2003 shock tests. Excluding large deals post-SOX Excluding large deals No exclusions

Dep. var.: Underpricing I II III IV V VI VII VIII IX

VC-backed 14.425 *** 4.271

21.780 *** 4.143

14.763 ***

4.50 1.58

4.14 1.39

4.62


-19.155 ***

-11.157 ***

-3.21

-3.61

-3.11


10.012 **

15.438 **

14.714 ***

2.23

2.48

4.15

VC-backed x Top underwriter x Post-2003 shock -12.779 ***

-17.302 ***

-11.338 ***

-2.99

-3.18

-2.93

VC/underwriter ties

5.819 ***

7.294 ***

5.773 ***

3.77

3.44

3.61

VC/underwriter ties x Post-2003 shock -5.504 ***

-7.155 ***

-4.256 **

-3.04

-3.20

-2.51

Large

2.470 2.590 3.582

1.01 1.04 1.43

Large x Post-SOX

1.474 1.651 2.037

0.59 0.66 0.80

Post-SOX

-4.380 -4.610 -2.866

-0.85 -0.89 -0.59

Top underwriter 2.664 3.021 1.661 0.564 0.869

-0.306

1.167 -0.553 0.134

1.56 1.45 0.95 0.29 0.32

-0.15

0.79 -0.34 0.09

Revision 0.628 *** 0.630 *** 0.624 *** 0.971 *** 0.922 *** 1.019 *** 0.928 *** 0.926 *** 0.891 ***

3.57 3.58 3.33 3.34

3.10

3.14

6.68 6.63 6.28

Stake -0.096 * -0.085 * -0.094 * -0.142

-0.118

-0.120

-0.088 ** -0.090 ** -0.085 *

-1.89 -1.65

-1.77

-1.44

-1.19

-1.20

-2.09 -2.16 -1.96

Size 0.761 0.532

1.041

0.969

1.156

-0.157

-0.288

-0.269

-0.464

0.84 0.57

1.06

0.46

0.54

-0.07

-0.30

-0.28

-0.46

Time to offer -0.766 -0.574

-0.444

0.113

0.525

0.169

-0.448

-0.214

-0.328

-0.45 -0.33

-0.25

0.05

0.25

0.09

-0.39

-0.18

-0.27

Industry return 23.338 22.666

18.670

20.291

20.301

2.774

19.089

20.513

16.290

1.43 1.39

1.06

0.82

0.80

0.12

1.39

1.49

1.11

Internet-related 0.163 -0.168

-1.805

0.153

-0.119

-1.728

0.239

0.249

-0.982

0.05 -0.05

-0.60

0.04

-0.03

-0.53

0.09

0.09

-0.35

Obs. 451 451 424 285 285 265 731 731 689

R2 0.37 0.37 0.39 0.48 0.48 0.51 0.41 0.41 0.42

Adj. R2 0.24 0.23 0.25 0.31 0.30 0.33 0.33 0.33 0.34

55

Appendix

Sample construction

The full sample considers the 2001-2016 period, excluding the years of the financial crisis (2008 and 2009), which are added back to the sample in robustness tests. The sample examining the 2003 shock and the 2012 shock, respectively, uses the 2001-2007 and 2010-2016 periods, respectively. Some robustness tests start the sample in 1998 or end the sample period in 2005-2006. The sample contains exchange-listed US IPOs and excludes issuers incorporated outside the US; American Depository Receipts (ADRs) and global IPOs; real estate investment trusts (REITs); investment funds, including business development companies; energy and commodity trusts; blank checks and special purpose acquisition companies (SPACs); deals with offer prices below $5; deals with offer value below ten million; deals with more than one year between announcement and offer date; unit offerings; and deals with missing data on underpricing and the main controls. Tests using certain additional measures (such as star analyst rating or firm age) use the subset of the sample with non-missing data. Regressions include Fama-French 49 industry fixed effects and time period (year-quarter of offer date) fixed effects. Robustness tests winsorize variables at one percent of each tail of the distribution.

Variable definitions

Variable Definition

Underpricing First-day return. Source: Dealogic.

VC-backed Indicator equal to 1 if the IPO is venture capital-backed. Source: Dealogic.

Top underwriter Indicator equal to 1 if the lead underwriter (lead manager; if multiple lead managers are present, the first lead manager listed) has underwriter reputation ranking of 8 or 9; 0 otherwise. Source: Dealogic; Professor Jay Ritter’s website, https://site.warrington.ufl.edu/ritter/files/2016/06/Underwriter-Rank-1980-2015.xls, updating data from Loughran and Ritter (2004).

VC/underwriter ties Log of one plus the aggregate number of links between VCs and underwriters backing the deal (including lead managers, co-managers, and bookrunners) based on other deals in the prior five years; 0 if no links or no VC backing. The measure counts all links based on prior deals involving any VC and underwriter backing this deal. Source: Thomson Reuters venture-backed IPO data and Dealogic.

Institution/

underwriter ties

Log of one plus the number of links between underwriters backing the deal and institutions that invested in IPOs with this underwriter in the prior five years; 0 if no links. The measure counts all links based on a prior deal involving any institution and underwriter involved in this deal. Measures are averaged at institution-underwriter-year level due to a high number of institutions investing in an average underwritten IPO. Similar to Reuter (2006), we use 13F reports filed by institutional investors after the IPO to indirectly proxy institutional investors in the IPO because of a lack of data on IPO allocations to institutions. We use 13F reports within one quarter of the IPO date and exclude reports showing a reduction in the number of shares held. 13F reports are filed by larger institutions (with aggregate holdings of 13F securities of at least $100 million). Source: Thomson Reuters institutional ownership data and Dealogic.

Post-2003 shock Indicator equal to 1 for offer dates on or after October 24, 2003 (the adoption of NASD Rule 2790). It also closely corresponds to the approval of the Global Settlement by SDNY (October 31, 2003) and effective date of the Voluntary Initiative (six months after April 28, 2003).

Post-2003 shock (effective)

Indicator equal to 1 for offer dates on or after March 23, 2004 (mandatory compliance date of NASD Rule 2790).

Post-2003 shock (April)

Indicator equal to 1 for offer dates on or after April 28, 2003 (the date when Global Settlement offer terms and Voluntary Initiative were announced). Regulation AC also went into effect in April 2003.

Post-FD Indicator equal to 1 for offer dates on or after October 23, 2000 (effective date of Regulation FD).

Post-2012 shock Indicator equal to 1 for offer dates on or after April 5, 2012 (date of enactment of the JOBS Act that contained EGC provisions).

EGC Indicator equal to 1 for issuers identified as EGCs in deals on or after April 5, 2012; 0 otherwise. Source: Dealogic.

Revision Percentage change from initial offer price to final offer price if revision is positive; and 0 otherwise. Source: Dealogic.

56

Stake Percentage stake offered in the IPO. Source: Dealogic.

Size Log of total IPO deal value excluding overallotments. Source: Dealogic.

Time to offer Log of one plus the number of days between announcement and offer. Source: Dealogic.

Industry return Fama-French 49 industry value-weighted portfolio return in the month prior to the month of the offer date. Source: Professor Kenneth French’s website, http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html, updating data from Fama and French (1997).

Internet-related Indicator equal to 1 for deals involving issuers whose primary business is Internet-related. Source: Dealogic.

Age Log of one plus the difference between the year of the IPO and the year of founding. Years of founding are obtained from Professor Jay Ritter’s website, https://site.warrington.ufl.edu/ritter/files/2016/09/FoundingDates.pdf. The Field-Ritter dataset updates the data used in Field and Karpoff (2002) and Loughran and Ritter (2004).

Star analyst Indicator equal to 1 for deals that were covered by a top 3 Institutional Investor all-star analyst from the underwriter in the year after the IPO, and 0 otherwise. Source: Professor Jay Ritter’s website, https://site.warrington.ufl.edu/ritter/files/2015/06/IPO-Analyst-Data-Online-1993-2009-2011-04-01.xls, updating data from Liu and Ritter (2011); Bradley and Ritter (2008); Cliff and Denis (2004); and Fang and Yasuda (2009).

High-tech indicator Indicator equal to 1 for issuers with three-digit SIC codes 283, 361-367, 381, 382, 384, 357, 737, and 873 (see also Chen, DeFond, and Park (2002)).

VC reputation Indicator equal to 1 if at least one of the VCs backing the deal accounts for one percent or more of VC-backed IPO market share in the prior five years; 0 if below one percent or no VC backing. Source: Thomson Reuters venture-backed IPO data and Dealogic.

PE-backed Indicator equal to 1 if the issuer has a financial sponsor that is not a VC. Source: Dealogic.

# local VCs Log of one plus the number of all VC firms located in the issuer’s metropolitan statistical area (MSA), including VC firms not involved in this deal. Source: Thomson Reuters data on VC firms involved in VC financing during 2001-2016. MSAs are identified from zip codes using Census relationship files.

# deals local VCs Log of one plus the number of VC deals involving all VC firms located in the issuer’s MSA, including VC firms not involved in this deal. Source: Thomson Reuters data on VC firms involved in VC financing during 2001-2016. MSAs are identified from zip codes using Census relationship files.

deal VCs' proximity to UW

Log of one plus the average number of securities firms (identified by NAICS code 523 in Compustat, including securities firms not involved in this deal) located within sixty miles of a VC firm involved in the deal in the prior five years; 0 if none or no VC backing. Source: Thomson Reuters data on VC-backed IPOs and on VC firms involved in VC financing during 2001-2016 and Compustat. Geographic coordinates are obtained from Census relationship files.

local VCs' proximity to UW

Log of one plus the average number of securities firms (identified by NAICS code 523 in Compustat, including securities firms not involved in this deal) located within sixty miles of any VC firm located in the issuer’s area, including VC firms not involved in the deal. Source: Thomson Reuters data on VC firms involved in VC financing during 2001-2016 and Compustat. Geographic coordinates are obtained from Census relationship files.

57

Background

NASD Rule 2790

NASD8 Rule 2790, Restrictions on the Purchase and Sale of Initial Equity Public Offerings, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7499. The rule was adopted on October 24, 2003, with the effective date for voluntary compliance on December 23, 2003 and mandatory compliance on March 24, 2004.

The rule was intended to strengthen protections for investors in IPOs by ensuring that:9 “(i) underwriters make a bona fide public offering at the offering price; (ii) do not withhold securities for their own benefit, or use allocations of IPO securities to reward persons that can direct future business to the investment bank (including money managers, such as venture capitalists and hedge fund managers, who are in a position to direct business to a broker-dealer); and (iii) ensuring that industry “insiders,” including underwriters and their associated persons, do not take advantage of their position to purchase new issues.”

Rule 2790 codified elements of the prior interpretative guidance on hot IPO offerings (IM-2110-1, Free-Riding and Withholding), as well as expanded the scope of the restrictions from hot issues (ones that trade at a premium when secondary trading begins) to all new issues and modified some of the restrictions (for example, eliminating the ability to make a facts-and-circumstances decision to allocate IPO shares to restricted persons if such allocations are consistent with the person’s “normal investment practice”).

The rule contained certain other provisions to conform to the expansion of the scope from hot issues to new issues and to streamline compliance (de minimis exception as an alternative to a carve-out; elimination of cancellation provisions (allowing an underwriter within a specified time period to cancel an allocation to a restricted person and reallocate such shares to a non-restricted person); and standardization of recordkeeping requirements). See https://www.finra.org/sites/default/files/NoticeDocument/p003046.pdf; http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=2691; http://www.shearman.com/~/media/files/newsinsights/publications/2003/10/nasd-rule-2790-revises-restrictions-on-the-purch__/files/download-pdf-nasd-2790-revises-restrictions-on-t__/fileattachment/am_101103.pdf

The rule did not apply to certain new issues, exempting offerings of restricted securities exempt from registration; commodity pool offerings; rights offerings; exchange offers; M&A-related registered offerings; investment grade asset-backed securities; convertible and preferred securities; offerings by registered investment companies, closed-end funds; ad offerings of shares or ADRs with an existing foreign market.10 See https://www.finra.org/sites/default/files/NoticeDocument/p003046.pdf.

The rule was amended on June 7, 2007 (amendments became effective September 5, 2007) to prohibit issuer-directed allocations of new issues to broker-dealers, with the exemption for issuer-directed non-underwritten offerings. See http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=3026.

8 On July 30, 2007, NASD and the member regulation, enforcement and arbitration operations of the New York Stock Exchange

(NYSE) were consolidated to form the Financial Industry Regulatory Authority (FINRA). See http://www.finra.org/newsroom/2007/nasd-and-nyse-member-regulation-combine-form-financial-industry-regulatory-authority. After the consolidation of NASD and NYSE Regulation into FINRA in 2007, FINRA developed a new consolidated rulebook. NASD Rule 2790 was superseded by consolidated FINRA Rule 5130 in 2008. See http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=7206 and http://finra.complinet.com/net_file_store/new_rulebooks/f/i/finra_08-57.pdf.

9 NYSE/NASD IPO Advisory Committee, Report and Recommendations, May 2003, pp. 10-11, https://www.finra.org/sites/default/files/Industry/p010373.pdf.

10 The rule was amended on August 4, 2005 (amendments became effective November 2, 2005) to exempt offerings of business development companies (BDCs), direct participation programs (DPPs), and real estate investment trusts (REITs). See http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=3179. These exemptions are irrelevant for our analysis because these categories are excluded from the sample, consistent with prior IPO studies.

58

Voluntary Initiative

Voluntary Initiative Regarding Allocations of Securities in "Hot" Initial Public Offerings to Corporate Executives and Directors, https://www.sec.gov/news/press/globalvolinit.htm. The Voluntary Initiative was announced on April 28, 2003 and became effective six months later, in October 2003. Participating underwriters would commit to abstain from allocating securities in a "hot" IPO (IPOs that trade at a premium in the secondary market when the secondary market begins) to accounts of executive officers or directors, or their immediate family members, of US public companies and public companies for which the principal equity trading market is in the US; to abstain from allocating IPO securities in exchange for or for the purpose of obtaining investment banking business; to proscribe investment banking personnel from having input into allocation of IPO securities to individual accounts; take reasonable steps to notify the issuer in writing that the underwriter may have allocated hot IPOs to the company's executive officers and directors and/or their immediate family members, in connection with any IPO in which the firm is seeking to become the lead or co-lead managing underwriter.

Participants in the Voluntary Initiative made a commitment to abide by its terms before the NASD, NYSE, SEC, NASAA, and the Office of the New York Attorney General. The Voluntary Initiative was to be effective for up to five years or until the effective date of a rule on hot IPO allocations to executive officers and directors, whichever is earlier (FINRA Rule 5131 became effective in May 2011).

For a list of participating underwriters, see Appendix A at http://www.willkie.com/~/media/Files/Publications/2003/10/New%20Voluntary%20Initiative%20Regarding%20IPO%20Allocations/Files/IPOAllocationspdf/FileAttachment/IPO_Allocations.pdf [Bear, Stearns & Co. Inc.; Credit Suisse First Boston LLC; Goldman, Sachs & Co; Lehman Brothers Inc.; J.P. Morgan Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith, Incorporated; Morgan Stanley & Co. Inc.; Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc.; UBS Warburg LLC; US Bancorp Piper Jaffray Inc.].

Proposed NASD Rule 2712 / FINRA Rule 5131

NASD rule to restrict IPO allocations to officers and directors of issuers (NASD Rule 2712 (http://www.complinet.com/file_store/pdf/rulebooks/nasd_0255.pdf) was proposed on September 15, 2003. It was adopted on September 29, 2010 as FINRA Rule 5131. Compliance with it became mandatory May 27, 2011 (http://finra.complinet.com/net_file_store/new_rulebooks/f/i/finra_10-60.pdf).

Analyst-related shocks

Regulation FD was adopted on August 15, 2000 and became effective on October 23, 2000.

NASD adopted Rule 2711 on analyst research, with compliance required between July 9, 2002 and November 6, 2002.11

As part of implementing Section 15D of Sarbanes-Oxley Act, the SEC adopted Regulation Analyst Certification (AC), which became effective on April 14, 2003.12

Ten large underwriters entered a settlement addressing certain conflicts of interest between investment banking and research analyst coverage (“Global Settlement”). The settlement terms were announced on April 28, 2003 and approved by the United States District Court for the Southern District of New York (SDNY) on October 31, 2003.13

11 http://www.complinet.com/file_store/pdf/rulebooks/nasd_0239.pdf.

12 https://www.sec.gov/rules/final/33-8193.htm.

13 See https://www.sec.gov/news/press/2003-54.htm (announced); https://www.sec.gov/litigation/litreleases/lr18438.htm and http://www.finra.org/industry/2003-global-settlement (approved by SDNY).

59

Table A1. Winsorization Panel B reports underpricing regressions with continuous variables winsorized at 1% of each tail of the distribution. Fama-French 49 industry and time period fixed effects are included. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Full sample Dep. var.: Underpricing

I II III IV V VI

VC-backed 5.826 *** 2.328 15.131 *** 2.660

4.37 1.12 4.25 1.28


-3.32


2.54

VC-backed x Top underwriter 4.658 *

12.854 ***

1.87 2.93

VC-backed x Top underwriter x Post-2003 shock -12.571 ***

-3.08

VC-backed x Top underwriter x Post-2012 shock 7.205 ***

2.77


5.695 ***

4.12 3.27

VC/underwriter ties x Post-2003 shock -5.166 ***

-2.83

VC/underwriter ties x Post-2012 shock 2.143 ***

2.65


0.10


0.26

Top underwriter 1.919 -0.231 1.397 -0.087

1.46 -0.14 0.56 -0.05

Revision 1.363 *** 1.352 *** 1.356 *** 1.361 *** 1.351 *** 1.354 ***

12.05 11.98 11.68 12.05 12.05 11.67

Stake -0.063 * -0.063 * -0.076 ** -0.076 ** -0.071 * -0.084 **

-1.72 -1.73 -2.03 -2.01 -1.92 -2.22

Size -0.023 0.272 0.305 0.050 0.302 0.398

-0.04 0.41 0.52 0.08 0.46 0.68

Time to offer -1.561 -1.386 -1.551 -1.446 -1.126 -1.446

-1.50 -1.34 -1.41 -1.39 -1.09 -1.31

Industry return 21.259 * 21.917 * 18.341 21.790 * 22.099 * 18.840

1.85 1.92 1.42 1.92 1.96 1.48

Internet-related -0.074 -0.181 -0.732 0.019 -0.361 -0.734

-0.04 -0.09 -0.34 0.01 -0.18 -0.34

Obs. 1439 1439 1301 1439 1439 1301

R2 0.45 0.45 0.46 0.45 0.45 0.47

Adj. R2 0.40 0.40 0.41 0.41 0.41 0.42

60

Table A2. Evaluating differences in issuer characteristics and their response to shock Panel A reports regressions of explanatory variables on the VC indicator and VC indicator interaction with the post-shock indicator with Fama-French 49 industry and time period fixed effects. The regressions are performed in the original samples (2001-2007 period around the 2003 shock and 2010-2016 period around the 2012 shock) and in the restricted sample excluding deals above the 95th percentile of VC-backed deal size and stake sold. Panel B reports underpricing regressions in the restricted sample for robustness, including Fama-French 49 industry and time period fixed effects. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Panel A: Comparison of the response of explanatory variables to the shock between VC and non-VC

deals

Dep. var. Revision Stake Size Time to offer Industry return

Original sample

2003 shock

VC-backed -1.542 0.431 -0.681 *** 0.271 ** -0.001

-0.73 0.15 -3.27 2.42 -0.07

VC-backed x Post-2003 shock 2.893 -3.405 0.362 * -0.297 ** 0.006

1.28 -1.13 1.66 -2.54 0.33

2012 shock

VC-backed 5.716 *** -2.616 -0.219 -0.044 -0.005

3.85 -1.25 -1.29 -0.50 -0.65

VC-backed x Post-2012 shock -1.667 2.726 0.008 -0.285 *** 0.002

-0.99 1.22 0.05 -3.04 0.27

Restricted sample

2003 shock

VC-backed -0.682 4.853 ** -0.152 0.119 -0.027

-0.30 2.40 -0.97 0.95 -1.50

VC-backed x Post-2003 shock 1.618 -4.107 * 0.076 -0.174 0.033 *

0.68 -1.86 0.45 -1.33 1.81

2012 shock

VC-backed 5.769 *** -0.080 0.200 -0.145 -0.017

3.17 -0.04 1.21 -1.39 -1.63

VC-backed x Post-2012 shock -2.319 -0.185 -0.102 -0.089 0.012

-1.19 -0.09 -0.63 -0.78 1.14

61

Panel B: Robustness tests in the restricted sample

Restricted full sample Dep. var.: Underpricing

I II III IV V VI

VC-backed 16.251 *** 3.759

4.052

16.251 *** 3.759

4.052

4.25

1.54

1.54

4.25

1.54

1.54


-12.601 ***

-3.06

-3.06


6.244 **

2.36

2.36


12.379 ***

12.379 ***

2.67

2.67


-12.239 ***

-12.239 ***

-2.92

-2.92


8.377 ***

8.377 ***

2.78

2.78

VC/underwriter ties

4.600 ***

4.600 ***

2.73

2.73


-5.073 ***

-5.073 ***

-3.04

-3.04


2.689 ***

2.689 ***

2.87

2.87


0.461

0.12

0.12


1.613

0.52

0.52


-1.958

-0.537

-0.740

-1.958

-0.537

-0.20

-0.90

-0.31

-0.20

-0.90

-0.31

Revision 1.357 *** 1.347 *** 1.348 *** 1.357 *** 1.347 *** 1.348 ***

9.48

9.49

9.21

9.48

9.49

9.21

Stake -0.144 * -0.131

-0.127

-0.144 * -0.131

-0.127

-1.77

-1.63

-1.41

-1.77

-1.63

-1.41

Size 2.903 ** 3.310 ** 3.139 ** 2.903 ** 3.310 ** 3.139 **

2.23

2.42

2.23

2.23

2.42

2.23


-0.671

-1.074

-1.079

-0.671

-1.074

-0.84

-0.52

-0.80

-0.84

-0.52

-0.80


20.810

16.630

21.315

20.810

16.630

1.49

1.46

1.04

1.49

1.46

1.04


0.029

-0.369

0.426

0.029

-0.369

0.19

0.01

-0.15

0.19

0.01

-0.15

Obs. 1066

1066

963

1066

1066

963

R2 0.47

0.47

0.49

0.47

0.47

0.49

Adj. R2 0.41

0.41

0.42

0.41

0.41

0.42

62

Table A3. Adding back financial crisis years This table reports underpricing regressions for the full sample, adding back financial crisis years (2008 and 2009). Fama-French 49 industry and time period fixed effects are included. Sample and variable definitions are presented in the Appendix. t-statistics based on robust standard errors are italicized.

Full sample Dep. var.: Underpricing

I

II

III

IV V VI

VC-backed 6.631 *** 3.477

15.714 *** 3.896 *

4.42

1.59

4.64

1.78


4.183 *

12.180 ***

1.65

2.88


-12.713 ***

-3.26


7.999 ***

2.93


-12.732 ***

-3.50


6.538 ***

2.78


0.771

0.28


-0.424

-0.15

VC/underwriter ties

2.330 ***

6.057 ***

4.40

3.65


-5.320 ***

-3.07


2.274 ***

2.68

Top underwriter 2.725 ** 0.837

2.152

0.987

1.97

0.50

0.83

0.59

Revision 1.112 *** 1.103 *** 1.110 *** 1.110 *** 1.102 *** 1.108 ***

5.91

5.86

6.17

5.90

5.84

6.17

Stake -0.071 * -0.071 * -0.086 ** -0.086 ** -0.078 ** -0.095 **

-1.83

-1.83

-2.17

-2.16

-2.03

-2.36

Size 0.484

0.723

0.861

0.549

0.739

0.946

0.62

0.90

1.13

0.71

0.92

1.25

Time to offer -2.277 ** -2.120 * -2.423 * -2.102 * -1.788

-2.291 *

-1.99

-1.86

-1.95

-1.84

-1.58

-1.84

Industry return 19.599 * 20.204 * 16.274

20.405 * 20.584 * 17.055

1.76

1.81

1.30

1.85

1.87

1.39


0.190

-0.304

0.400

-0.029

-0.332

0.14

0.09

-0.14

0.19

-0.01

-0.15

Obs. 1480

1480

1325

1480

1480

1325

R2 0.40

0.40

0.41

0.41

0.41

0.42

Adj. R2 0.35

0.35

0.36

0.35

0.35

0.36

sinners or saints? top underwriters, venture capitalists, and ipo … · 2018. 12. 5. · anzhela...

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