3.3. Data and Methods
3.4.2. Additional Tests
Dunbar (2000) finds that the factors affecting underwriter market share are more significant for the established banks in low-volume IPO markets. Fernando et al. (2005) also argue that the matching between underwriters and issuers is affected by the level of activity in the equity issue market. To determine if the conclusions regarding our hypothesis on withdrawal-averting effort are robust to the regime change in the market environment, we rerun our regressions for subsamples of different periods. Since our study covers both the hot IPO market before the burst of the Internet bubble in 2001 and the cold IPO market afterward, we first examine the effect of withdrawal-averting effort on underwriter market share change for offerings before and after 2000 separately, using the withdrawal probabilities estimated from the probit models within each sample period. We then examine that effect for different IPO market segments – by offering size and by the corresponding underwriter’s market share separately. For each regression, we provide an alternative set of explanatory variables as a supplement to decomposing withdrawal screening from withdrawal averting. These alternative variables, similar to those in
43
For example, an increase of market share for a bank might be due to the increased withdrawals underwritten by the bank and thus does not represent an increase in its competitiveness.
Model 5 in section 3.4.1, include the withdrawal dummy and the probability of withdrawal multiplying the withdrawal dummy. The results of these alternative models are also reported at the bottom of each regression in Table 3.5.
As reported in Table 3.5 (Panel A), we find that withdrawal-averting effort is still significantly and positively related to underwriter market share change for both the cold and the hot market periods, and we find no evidence on such effect of withdrawal screening. Our conclusion regarding the hypothesis on withdrawal-averting effort, therefore, does not change. A detailed examination of the alternative models shows a pattern for the post-2000 period similar to that of the whole sample period. Whereas market share decrease is significantly associated with observed withdrawals, the ex ante estimated withdrawal probability of these withdrawals is also an important concern. However, this is not the case for the period between 1996 and 2000, since none of the variable coefficients is significant. The withdrawal-averting effect on the market share change should thus be attributed to a mixed effect of withdrawal probability and realized withdrawal or completion.
We report in panel B the regression results for offerings grouped by underwriter market share larger than 4%, less than 4%, 3%, 2%, and 1% separately. Withdrawal- averting effort is significantly and positively correlated to the underwriter market share change for large banks, and the correlation is insignificant for small banks with market share less than 2%. We interpret that the small banks have less market power and thus are less likely to adopt withdrawal averting as a competitive strategy. Panel C reports the results for offerings grouped by offering size measured in 1984-constant dollars. Offerings with proceeds larger than $100 million are extremely large deals, and those
smaller than $10 million are extremely small ones. Each of these two groups occupies about 11.9% of the total samples. We then separate the offerings in-between into large offerings or small offerings by setting a threshold of $32 million. We see that underwriter market share maintains its positive correlation to withdrawal-averting effort for the majority of the offerings except for the extremely large or extremely small offerings.
Our conclusion about the hypothesis on withdrawal-averting effort is fairly robust to both sample periods before and after the year 2000. The results are more pronounced in the subsample of offerings underwritten by banks with market share in excess of 2% (63% of the entire sample) and those between $10 million and $100 million (76% of the sample).
We also observe some significant changes in the coefficients of some bank-level performance variables. First of all, the banks’ IPO performance of one-year excess returns affects their underwriter market share changes differently before and after 2000. Before 2000, banks with better long-term IPO performance gain market share, consistent with the argument that investment banks screen out firms with bad evaluations (Chemmanur and Fulghieri 1994). After 2000, banks associated with overpriced IPOs gain future business, consistent with our argument in chapter 2 that banks compete on “saving” potential withdrawals in the cold market.44 Second, the coefficient of business industry concentration is significantly negatively related to the underwriter market share change for the period of 2001 to 2007, opposite to the result for the period of 1996 to 2000. It implies an optimal strategy for banks to increase their industry specialization
44
Ritter (1991) and Loughran and Ritter (1995) suggest that long-running underperformance of IPOs can result from improper price in the early aftermarket.
when the IPO market is hot, since the pricing can be improved due to information spillovers (Booth and Chua 1996; Benveniste et al. 2002). The same strategy, however, can be very risky, as Dunbar (2000) argue, when the industry makeup changes dramatically in the cold IPO market. Finally, we observe that the effects of first-day initial returns on the underwriter market shares for some small banks (for example, those with average market share between 1% and 2%) are in opposition to those for the larger banks. This suggests that, for these smaller banks to grow their market shares, substantial underpricing is essential to attract sufficient investor biddings for the offerings underwritten by these banks.
Table 3.5: Additional tests.
Panel A: Robust test for different sample periods Independent variable:
Underwriter IPO Market Share Change
1996 – 2007 1996 – 2000 2001 – 2007
Coefficient - t-stat Coefficient - t-stat Coefficient - t-stat
Intercept -1.187 -4.34 *** -1.341 -4.77 *** 1.127 1.53
Estimated probability of withdrawal 0.486 1.14 0.463 0.91 -0.014 -0.02
Withdrawal-averting effort (prediction error) 0.680 2.69 ** 0.446 1.85 * 1.191 1.74 *
Bank’s overall IPO performance in two years
Mean abnormal first-day initial return -3.716 -5.15 *** -4.010 -5.56 *** -0.221 -0.07
Min. abnormal first-day initial return 1.560 4.18 *** 2.270 6.00 *** -0.863 -0.58
Max. abnormal first-day initial return 0.478 6.43 *** 0.487 6.59 *** -1.224 -1.69 *
Mean abnormal spread -0.937 -2.30 ** 0.566 1.29 -2.104 -2.69 **
Min. abnormal spread 0.020 0.12 -0.443 -2.25 ** 0.193 0.66
Max. abnormal spread 0.884 3.53 *** -0.146 -0.59 1.857 3.93 ***
Mean one-year excess return 0.857 3.70 *** 1.719 7.49 *** -2.076 -2.70 **
Min one-year excess return -0.194 -0.87 -0.919 -4.03 *** 2.136 3.38 ***
Max one-year excess return 0.009 0.35 -0.031 -1.40 0.094 1.15
Percentage of withdrawals 0.007 1.25 0.003 0.70 -0.005 -0.41
Business industry concentration 0.996 3.26 ** 1.409 4.77 *** -1.536 -1.74 *
Bank’s performance changes over two years
Change of mean abnormal first-day return 2.975 4.54 *** 3.109 4.70 *** 2.869 0.75
Change of min. abnormal first-day return -0.789 -2.34 ** -1.118 -3.48 *** -1.031 -0.68
Change of max. abnormal first- day return -0.161 -2.80 ** -0.195 -3.40 *** -1.802 -2.94 **
Change of mean abnormal spread -1.113 -3.19 ** -1.381 -3.92 *** -1.096 -1.09
Change of min. abnormal spread -0.370 -2.48 ** -0.386 -2.40 ** -0.260 -0.96
Change of max. abnormal spread 1.716 7.50 *** 1.961 8.74 *** 1.828 4.18 ***
Change of withdrawn percentage 0.016 3.87 *** 0.019 6.57 *** 0.014 1.26
Change of industry concentration 2.600 8.94 *** 2.583 9.29 *** 3.113 3.73 ***
Adjusted R2 0.086 0.145 0.051
Number of observations 3492 2474 1018
Alternative models:
Withdrawn probability, withdrawals only 2.331 3.42 *** 1.155 1.34 3.645 2.93 **
Withdrawn probability, completed offerings -0.108 -0.16 0.684 1.03 -1.469 -1.11
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Panel B: Market segments based on IPO market share of the corresponding investment banks
Samples grouped by underwriter market share (the average of lag and lead market share) Independent variable:
Underwriter IPO Market Share Change
> 4% ≤ 𝟒% ≤ 𝟑% ≤ 𝟐% ≤ 𝟏%
Coefficient - t-stat Coefficient - t-stat Coefficient - t-stat Coefficient - t-stat Coefficient - t-stat
Intercept -3.102 -3.62 *** 0.215 2.40 ** -0.013 -0.17 -0.015 -0.24 0.016 0.44
Estimated probability of withdrawal 1.560 1.83 * -0.074 -0.54 -0.299 -2.34 ** 0.071 0.70 -0.132 -2.81 **
Withdrawal-averting effort(prediction error) 1.154 2.21 ** 0.204 2.52 ** 0.147 2.03 ** -0.033 -0.64 0.053 1.59
Bank’s overall IPO performance in two years
Mean abnormal first-day initial return -11.288 -4.90 *** 0.770 3.82 *** 0.835 4.47 *** 0.696 3.89 *** -0.176 -1.73 *
Min abnormal first-day initial return 2.840 3.27 ** -0.634 -5.41 *** -0.579 -5.46 *** -0.435 -5.09 *** -0.033 -0.57
Max abnormal first-day initial return 0.761 5.83 *** -0.333 -9.71 *** -0.355 -8.27 *** -0.301 -4.36 *** 0.106 3.22 **
Mean abnormal spread 0.586 0.24 0.098 0.75 -0.055 -0.45 -0.214 -2.64 ** -0.009 -0.21
Min abnormal spread -0.392 -1.00 -0.080 -1.35 -0.053 -0.90 0.049 1.25 0.005 0.23
Max abnormal spread 1.359 2.86 ** -0.030 -0.43 0.085 1.41 0.150 3.38 *** 0.014 0.59
Mean one-year excess return 4.032 5.02 *** 0.089 1.24 0.280 4.08 *** 0.261 4.71 *** 0.059 1.41
Min one-year excess return -0.720 -0.93 0.179 2.71 ** -0.016 -0.26 -0.059 -1.21 0.023 0.70
Max one-year excess return -0.024 -0.47 -0.028 -3.02 ** -0.064 -6.19 *** -0.067 -6.73 *** -0.026 -1.75 *
Percentage of withdrawals -0.004 -0.19 -0.001 -0.84 0.001 1.15 -0.001 -1.23 0.000 0.67
Business industry concentration -0.803 -0.26 -0.248 -2.45 ** 0.071 0.79 0.056 0.81 0.016 0.41
Bank’s performance changes over two years
Change of mean abnormal first-day return 8.609 6.63 *** -0.589 -2.70 ** -0.340 -1.51 -0.036 -0.20 -0.056 -0.62
Change of min. abnormal first-day return -1.476 -2.11 ** -0.535 -5.10 *** -0.399 -4.07 *** -0.372 -3.85 *** -0.120 -2.44 **
Change of max. abnormal first-day return -0.364 -3.56 *** 0.029 0.83 0.073 1.69 * 0.187 2.86 ** 0.085 2.95 **
Change of mean abnormal spread -4.966 -2.00 ** 0.122 1.07 0.200 1.92 * 0.028 0.41 0.065 1.44
Change of min. abnormal spread -0.611 -2.08 ** -0.267 -4.64 *** -0.344 -5.74 *** -0.101 -2.75 ** -0.059 -2.58 **
Change of max. abnormal spread 1.894 4.94 *** 0.564 7.91 *** 0.426 6.90 *** 0.280 6.15 *** 0.151 5.98 ***
Change of withdrawn percentage 0.002 0.19 0.002 2.14 ** 0.004 3.87 *** 0.002 2.46 ** 0.001 2.68 **
Change of industry concentration 10.900 7.98 *** -0.136 -1.81 * -0.065 -0.95 -0.096 -1.79 * -0.188 -5.72 ***
Adjusted R2 0.194 0.185 0.272 0.313 0.250
Number of observations 1587 1905 1606 1316 1009
Alternative models:
Withdrawn probability, withdrawals only 4.198 3.32 *** -0.142 -0.60 -0.565 -2.50 ** -0.029 -0.15 -0.151 -1.37
Withdrawn probability, completed offerings 0.455 0.28 0.367 2.19 ** 0.169 1.26 0.079 0.79 -0.051 -0.99
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Panel C: Market segments based on IPO size
Samples grouped by offering size (proceeds in millions of 1984-constant dollars) Independent variable:
Underwriter IPO Market Share Change
𝑷𝒓𝒐𝒄𝒆𝒆𝒅𝒔> 100 𝟏𝟎𝟎 ≥ 𝑷𝒓𝒐𝒄𝒆𝒆𝒅𝒔> 32 𝟑𝟐 ≥ 𝑷𝒓𝒐𝒄𝒆𝒆𝒅𝒔> 10 𝟏𝟎 ≥ 𝑷𝒓𝒐𝒄𝒆𝒆𝒅𝒔
Coefficient - t-stat Coefficient - t-stat Coefficient - t-stat Coefficient - t-stat
Intercept -5.034 -2.93 ** -1.312 -2.17 ** -0.520 -1.63 0.120 1.64
Estimated probability of withdrawal 3.398 1.94 * 0.579 0.82 0.322 0.54 0.037 0.31
Withdrawal-averting effort (prediction error) -0.953 -0.63 1.051 2.13 ** 0.543 1.90 * -0.051 -0.76
Bank’s overall IPO performance in two years
Mean abnormal first-day initial return -14.165 -3.50 *** -6.931 -4.60 *** -1.337 -1.03 1.503 2.39 **
Min. abnormal first-day initial return 3.508 2.25 ** 1.391 2.35 ** 0.911 1.78 * -0.901 -2.30 **
Max. abnormal first-day initial return 0.829 2.82 ** 0.507 4.62 *** 0.270 2.49 ** -0.569 -2.22 **
Mean abnormal spread 0.740 0.18 -2.322 -1.80 * -0.682 -0.91 0.259 1.58
Min. abnormal spread 0.348 0.53 -0.063 -0.18 0.045 0.20 -0.153 -1.63
Max. abnormal spread 2.166 2.86 ** 1.138 2.27 ** 0.112 0.24 -0.102 -1.38
Mean one-year excess return 5.481 3.81 *** 1.567 2.79 ** 1.220 4.21 *** 0.357 2.91 **
Min. one-year excess return -2.027 -1.33 0.176 0.37 -0.469 -1.59 -0.142 -1.86 *
Max. one-year excess return -0.038 -0.51 0.007 0.16 -0.060 -1.87 * -0.163 -3.18 **
Percentage of withdrawals 0.040 0.90 0.007 0.55 -0.001 -0.23 -0.002 -1.28
Business industry concentration 3.759 1.14 0.052 0.05 0.168 0.45 -0.126 -1.32
Bank’s performance changes over two years
Change of mean abnormal first- day return 10.208 4.49 *** 3.789 3.67 *** 1.565 1.57 -0.813 -1.93 *
Change of min. abnormal first-day return -1.500 -1.34 -0.713 -1.31 -1.329 -3.16 ** 0.432 1.92 *
Change of max. abnormal first-day return -0.490 -2.25 ** -0.130 -1.59 -0.172 -1.84 * 0.323 1.48
Change of mean abnormal spread -4.909 -1.16 -0.434 -0.44 -1.359 -2.09 ** 0.126 0.83
Change of min. abnormal spread -1.060 -1.82 * -0.596 -2.36 ** -0.053 -0.25 0.007 0.09
Change of max. abnormal spread 2.185 2.98 ** 2.080 5.06 *** 1.523 3.52 *** 0.081 1.84 *
Change of withdrawn percentage -0.040 -1.74 * 0.027 3.19 ** 0.012 2.90 ** 0.002 1.47
Change of industry concentration 6.575 2.61 ** 4.861 6.25 *** 1.043 3.57 *** -0.168 -2.15 **
Adjusted R2 0.131 0.132 0.071 0.103
Number of observations 416 1324 1340 412
Alternative models:
Withdrawn probability, withdrawals only 5.829 2.61 ** 2.897 2.65 ** 1.212 1.32 -0.024 -0.14
Withdrawn probability, completed offerings -2.502 -0.44 -0.390 -0.28 0.441 0.57 -0.013 -0.11