Shane A. Corwin

The Determinants of Underpricing for Seasoned Equity Offers

Seasoned offers were underpriced by an average of 2.2 percent during the 1980s and 1990s, with the discount increasing substantially over time. The increase appears to be related to Rule 10b-21 and to economic changes affecting both IPOs and SEOs. Consistent with temporary price pressure, underpricing is positively related to offer size especially for securities with relatively inelastic demand. Underpricing is also positively related to price uncertainty and, after Rule 10b-21, to the magnitude of preoffer returns. Additionally, I find that underpricing is significantly related to underwriter pricing conventions such as price rounding and pricing relative to the bid quote.

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

We examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co-managers. More comanagers also result in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free-riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size. Almost all IPO syndicates include one or more co-managers and several non-managing underwriters. Despite this, there has been almost no recent academic research on the functions of syndicate members or the determinants of syndicate participation. What determines the structure of an IPO syndicate? What purpose do co-managers and non-managing syndicate members serve? In this paper, we use a sample of 1,638 IPOs from January 1997 through June 2002 to examine these questions. We find evidence of information production by syndicate members. Specifically, we examine how syndicate structure affects the likelihood and magnitude of offer price revisions in response to information revealed during the filing period. As a proxy for this information, we use the total return from the midpoint of the filing price range to the closing price on the first day of trading. We find that offer prices are more likely to be adjusted up (down) in response to positive (negative) information when the underwriting syndicate is less concentrated or has more co-managers. We note that upward price revisions generally result in reduced underpricing. However, after controlling for price revisions, we find no additional relation between syndicate structure and IPO underpricing. Information from co-managers can be conveyed to the book manager in two ways. First, underwriters may relay information about market interest in an IPO directly to the book manager. Underwriters that we spoke with said they often talked to some book managers during the IPO process. Second, co-managers may convey information indirectly through conversations with the issuer, who then uses this information in negotiations with the book manager. Since issuers are more likely to bring up positive information during pricing negotiations, we expect that information conveyed by co-managers “whispering in the issuer’s ear” will more likely lead to upward than downward price revisions. Thus, our finding that syndicate structure affects both upward and downward price revisions suggests that comanagers relay information directly to the book manager in at least some cases. Syndicate members also provide analyst coverage and market making services in the aftermarket. All else being equal, we show that each additional co-manager in a syndicate results in one additional market maker. We also find that each additional co-manager results in 0.8 additional analysts issuing reports in the three months after an IPO. The number of non-managing syndicate members is not significantly related to either analyst coverage or market making in the aftermarket. Additional evidence on the importance of analyst coverage comes from our probit model estimates of the determinants of syndicate participation. For large IPOs, we find that having a top-ranked analyst in the issuer’s industry significantly increases the likelihood that an underwriter is included in a syndicate either as a co-manager or in a non-managing role. We also find that geography is a significant determinant of syndicate participation. Underwriters are more likely to be included in a syndicate if they are in the same state as the issuer, particularly if the book manager is based elsewhere. This suggests that

Limited Attention and the Allocation of Effort in Securities Trading

While limited attention has been analyzed in a variety of economic and psychological settings, its impact on financial markets is not well understood. In this paper, we examine individual NYSE specialist portfolios and test whether liquidity provision is affected as specialists allocate their attention across stocks. Our results indicate that specialists allocate effort toward their most active stocks during periods of increased activity, resulting in less frequent price improvement and increased transaction costs for their remaining assigned stocks. Thus, the allocation of effort due to limited attention has a significant impact on liquidity provision in securities markets.

Nasdaq Trading Halts: The Impact of Market Mechanisms on Prices, Trading Activity, and Execution Costs

We study the effects of alternative halt and reopening procedures on prices, transaction costs, and trading activity for a sample of news-related trading halts on Nasdaq. For intraday halts that reopen after only a five-minute quotation period, inside quoted spreads more than double following halts and volatility increases to more than nine times normal levels. In contrast, halts that reopen the following day with a longer 90-minute quotation period are associated with insignificant spread effects and significantly dampened volatility effects. These results are consistent with the hypothesis that increased information transmission during the halt results in reduced posthalt uncertainty.

Investment Banking Relationships and Analyst Affiliation Bias: The Impact of the Global Settlement on Sanctioned and Non-Sanctioned Banks

We examine the impact of the Global Settlement on affiliation bias in analyst recommendations. Using a broad measure of investment bank-firm relationships, we find a substantial reduction in analyst affiliation bias following the settlement for sanctioned banks. In contrast, we find strong evidence of bias both before and after the settlement for affiliated analysts at non-sanctioned banks. Our results suggest that the settlement led to an increase in the expected costs of issuing biased coverage at sanctioned banks, while concurrent self-regulatory organization rule changes were largely ineffective at reducing the influence of investment banking on analyst research at large non-sanctioned banks.

The Changing Nature of Investment Banking Relationships

We examine relationships between firms and their investment banks (IBs), both within and across different IB functions. For all transaction types, we find an increase in the number of relationships and a decrease in relationship exclusivity over time. We identify significant transaction-type specific relationship components, with relationships being strongest for equity and weakest for M&A. Relationships are less exclusive for firms with more bargaining power and more exclusive for younger, smaller firms, and firms with more growth options. Most importantly, we find strong evidence of a firm-wide relationship component that spans the functional areas of I-banking and increases over time.

Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks

Current National Market System rules do not recognize odd lots in the protected intermarket quote. Thus, liquidity demanders can receive worse prices than they would receive if odd lots were protected. The effect of ignoring odd lots is magnified because off-exchange trades (over one-third of total volume) benchmark executions against the protected quote. The authors identify time intervals with an unprotected odd lot limit order at a price better than the protected quote and examine trades during those intervals for 10 high-priced stocks during one week in 2015. They find over 406,000 intervals, representing 37% of sample stock trading time, in which an odd lot order betters the protected quote. Examining trades within these intervals, they find nearly 55,000 cases in which the trade price is worse than the odd lot price. In total, the price disimprovement in their 10 stocks is

A Simple Way to Estimate Bid-Ask Spreads from Daily High and Low Prices

554,675 for the week examined. This previously undocumented trading cost is associated with the corporate decision not to split a stock’s price in a market in which odd lot orders are excluded from the protected quote.