The influence of underwriter reputation, financial distress, and Keiretsu affiliation on the underpricing of Japanese IPOs

Abstract

This paper will examine the underpricing of TPOs that were issued in Japan. Three critical associations will be examined for their effects on the mispricing of IPOs. Following the theory of Chemmanur and Fulghieri ( 1994), we will document the relationship between underwriter reputation and underpricing. Second, we will document the effect of a firm's keiretsu affiliation on underpricing. No study to date has controlled for the simultaneous influences of both the keiretsu structure and underwriter reputation effects. The potential mitigation of informational asymmetry that is prevalent in the pricing of IPOs could be greatly affected by the joint presence of these two factors. Additionally, we will examine the joint effect of financial distress and keiretsu affiliation on the degree of underpricing of lPOs. We will examine these effects in the period before and following changes from a fixed price IPO market to one based on a price discriminatory auction. Further, we will examine these effects in the period before and after the Japanese stock market crash.