The Relationship between Investment Banks and Institutional Investors, Boosts, and Benefit Transfer in IPOs
SHAO Xinjian, WANG Xingchun, JIA Zhongzheng, LIAO Jingchi
School of International Trade and Economics, University of International Business and Economics; Institute of World Economics and Politics, Chinese Academy of Social Sciences; Research Institution, Shenzhen Stock Exchange
Summary:
Investment bank is one kind of the most important intermediaries in direct financing. As the representative of security issuer, an investment bank's competitiveness partly originates from its networks of relationship investors, which have been rarely discussed in the literature. Based on the complete records of institutional investors' participation in Chinese IPOs‘ book-building process, we have designed a new dynamic measure of the relationship between an investment bank and institutional investors. Furthermore, we have analyzed in detail how this relationship affects IPO pricing. The main results are as follows. (1) An investment bank can drive related investors to take part in the IPO process and submit high bids that are consistent with the underwriter analyst’s valuation. This implies that the investment bank can alleviate the uncertainty of investor participation in IPO auctions by its networking ability. (2) The boost from related investors can significantly increase IPOs' offering price and the under-writing fee paid to the investment bank. However, when the trading price converges to its intrinsic value gradually in the long run, the appearance of more related investors in the IPO process will predict lower long-term return to investors. (3) The relationship between the investment bank and institutional investors is reciprocal in essence. Once the investment bank is granted allocation discretion, it will be inclined to allocate money left on the table to its related investors. The stronger the relationship, the larger probability that bids will be considered affective. Given that their bids are judged affective, related investors' demand for new issues will be satisfied preferentially. This paper makes three contributions to the literature. First, we present a new mechanism for interest distribution in the IPO process. The traditional literature usually assumes that the principal-agent problem exists between the IPO issuer and the investment bank (IB) responsible for the underwriting. The IB is inclined to underprice the IPO relative to its intrinsic value. Then, due to its allocation discretion, it will allocate the underpriced new issues to its connected investors, who will transfer part of the revenues to the underwriter, such as in the form of brokerage fees. This quid pro quo thus conflicts with the issuer's interests. However, if underwriting fees gained by the IB are positively related to the IPO offering price, the interest of the IB should be bundled with the IPO issuer and there will be no serious principal-agent problem. We find that the IB has a significant incentive to overprice the IPO according to the high bids of its connected institutional investors, so the issuer can obtain more IPO proceeds. In addition, the IB can favor connected investors over time. For example, once underwriting IBs are granted allocation discretion, they will allocate underpriced new shares to their connected investors who have supported the bidding of prior IPOs. Second, this paper provides a new method to measure the relationship between investment banks and institutional investors, which considers both IPO issuers' participation and the relative bidding prices of investors. Based on brokerage fee data, the traditional method can only identify one special investor (fund)-underwriter relation. In contrast, our new method can measure underwriters' connection with all kinds of investors. Furthermore, compared to the method based on only participation frequency, our method also considers whether investors' bidding prices are consistent with underwriters' expectations, which means that connections can be more accurately measured. Third, our findings extend the understanding of the efficiency of IPO auction methods. The classical literature usually concludes that auction methods lack efficiency in pricing IPOs because the underwriters have no allocation discretion, which is a key instrument to encourage investors to produce information on IPOs in the book-building process. One problem in IPO auction is investors' participation uncertainty. However, our empirical research finds that underwriters can solve this problem through their connections with institutional investors. It suggests that networks between IBs and investors can replace underwriters' allocation discretion to some extent. Furthermore, this paper shows that an underwriter will be inclined to allocate underpriced new issues to its connected investors once it gains allocation power. Thus, from the perspectives of fairness and efficiency, IPO auction methods will perform better than the traditional literature predicts if the function of the underwriter-investor relationship is considered seriously.
邵新建, 王兴春, 贾中正, 廖静池. 投资银行-机构投资者关系、“捧场”与IPO中的利益问题[J]. 金融研究, 2019, 473(11): 170-188.
SHAO Xinjian, WANG Xingchun, JIA Zhongzheng, LIAO Jingchi. The Relationship between Investment Banks and Institutional Investors, Boosts, and Benefit Transfer in IPOs. Journal of Financial Research, 2019, 473(11): 170-188.
[1]黄瑜琴、李莉和陶利斌,2013,《机构投资者报价行为、承销商定价策略与IPO市场表现研究》,《金融研究》第7期,180～193。 [2]李冬昕、李心丹、俞红海和朱伟骅,2014,《询价机构报价中的意见分歧与IPO定价机制研究》,《经济研究》第7期,151～164。 [3]邵新建、薛熠、江萍、赵映雪和郑文才,2013,《投资者情绪、承销商定价与IPO新股回报率》,《金融研究》第4期,127～141。 [4]邵新建、何明燕、江萍、薛熠和廖静池,2015,《媒体公关、投资者情绪与证券发行定价》,《金融研究》第9期,190～206。 [5]邵新建、洪俊杰和廖静池,2018,《中国新股发行中分析师合谋高估及其福利影响》,《经济研究》第6期,82～96。 [6]宋顺林和唐斯圆,2016,《投资者情绪、承销商行为与IPO定价——基于网下机构询价数据的实证分析》,《会计研究》第2期,66～72。 [7]孙淑伟、肖土盛、付宇翔和陈信元,2015,《IPO 配售中的利益联盟——基于基金公司与保荐机构的证据》,《财经研究》第5期,90～101。 [8]汪昌云和武佳薇,2015,《媒体语气、投资者情绪与IPO定价》,《金融研究》第9期,174～189。 [9]王木之和李丹,2016,《资本市场中的媒体公关:来自我国企业IPO的经验证据》,《管理世界》第7期,121～136。 [10]俞红海、李心丹和耿子扬,2015, 《投资者情绪、意见分歧与中国股市IPO之谜》,《管理科学学报》第3期,78～89。 [11]郑琦、薛爽,2015,《自主配售权、关系投资者与IPO网下配售》,《外国经济与管理》第9期,29～44。 [12]朱红军和钱友文,2010,《中国IPO高抑价之谜:定价效率观还是租金分配观？》,《管理世界》第6期,28～49 [13]邹高峰、张维和王慧,2015,《新股发行估值、首日收益与长期表现》,《系统工程理论与实践》第4期,828～836。 [14]Benveniste, M. L. and P.A. Spindt, 1989,“ How Investment Bankers Determine the Offer Price and Allocation of New Issues”, Journal of Financial Economics, 24(2), pp.343～361. [15]Biais, B., P. Bossaerts and J.C. Rochet, 2002,“An Optimal IPO Mechanism”,Review of Economic Studies, 69(1), pp.117～146. [16]Binay,M., V. Gatchev and C.Pirinsky, 2007, “The Role of Underwriter-Investor Relationship in the IPO Process”,Journal of Financial and Quantitative Analysis, 42(3), 785～810. [17]Cornelli, F. and D. Goldreich,2003, “Bookbuilding: How Informative is the Order Book？ ” Journal of Finance, 58(4), pp.1415～1443. [18]Derrien, F.,2005, “ IPO Pricing in Hot Market Conditions: Who Leaves Money on the Table？ ” , Journal of Finance,60(1), 487～521. [19]Gu Z., Z. Li and Y.G. Yang,2013, “Monitors or Predators: The Influence of Institutional Investors on Sell-Side Analysts”, The Accounting Review,88(1), pp.137～169. [20]Henderson ,B. and H. Tookes, 2012, “Do Investment Banks' Relationships with Investors Impact Pricing-The Case of Convertible Bond Issues”, Managment Science, 58(12), pp.2272～2291. [21]Huang, R., Z. Shangguan and D. Zhang, 2008, “The Networking Function of Investment Banks: Evidence from Private Investment in Public Equity”, Journal of Corporate Finance ,14 (5), pp.738～752. [22]Jagannathan, R. , A. Jirnyi and A.G. Sherman,2015, “Share Auctions of Initial Public Offerings:Global Evidence”,Journal of Financial Intermediation,24(3),pp.283～311. [23]Luo,W.,H.Yue and L. Zhang, 2015, “Friends Can Help: The Effects of Relationships in the Chinese Book-Building Process”,Working Paper. [24]Nimalendran,M. ,J.R. Ritter and D. Zhang,2007, “Do Today's Trades Affects Tomorrows IPO Allocations”, Journal of Financial Economics,84(1), pp.87-109. [25]Reuter, J., 2006, “Are IPO Allocation for Sale Evidence from Mutual Funds”, Journal of Finance, 61(5), pp.2289～2324. [26]Sherman,E. A.,2005, “ Global Trends in IPO Methods: Book Building versus Auctions with Endogenous Entry”, Journal of Financial Economics, 78(3), pp.615～649.
