Underwriter Deal Pipeline and the Pricing of IPOs (Digest Summary)

The authors examine 1,058 completed IPOs for evidence of the impact of the deal pipeline experienced by the underwriters. They find statistically significant relationships between both (1) first-day returns and the price adjustment between IPO price and first-day prices and (2) first-day returns and the metrics of the pipeline in the same industry as the issuer but not the pipeline in other industries. When combined with a comprehensive set of control variables, a regression model of both price changes shows increased explained variance. The authors include a discussion of the theoretical models of IPO pricing and their relationship to the price changes tested.

The impact of a deal pipeline on IPO pricing has potential implications for every interested party. Better understanding would allow issuers to respond appropriately to changes in the deal pipeline of their bookrunner, which might involve increasing contact with the bookrunner in cases of intra-industry pipeline increases to try to ensure that pricing is not affected. Underwriters might want to monitor their own responses to pipeline changes in order to maintain their reputation for unbiased pricing. They should be particularly wary of a large volume of offerings in a single industry. For IPO participants, the order-raising process could be informed by these findings. In the simplest terms, they might seek to participate more heavily in IPOs where the intra-industry pipeline is growing to benefit from higher first-day returns. Although the findings are not significant enough to be a principal decision-making factor, they are of interest to all of these groups.

In addition, regulators would likely find this research a useful insight into the theoretical and empirical basis for the impact of agency issues in IPO pricing. The authors note in particular the reduction in transparency caused by the Jumpstart Our Business Startups Act, which allows confidential filing of some IPO registration documents.

The authors source the dataset of IPOs from the Thomson Financial Securities Data New Issues Database and include all IPOs between 2001 and 2014 according to their filing of form S-1. The Thomson Reuters data are augmented with EDGAR and CRSP data. The authors provide descriptive statistics of this dataset and explain the construction of their bookrunner pipeline variables with an example in the appendix.

The authors regress the first-day returns of the issues’ equity and the price adjustment between IPO and first-day returns against bookrunner pipeline variables and control variables, including properties of the issuer, the bookrunner, and the recent market environment. They compare these results with those of the regression against control variables alone and examine the asymmetric impact of the variables and their interaction with each other.

The question of agency issues in this context is very important to both IPO issuers and participants. For some practitioners, however, the bookrunner issue is perhaps too nuanced. More pressing reading might come in the form of some of the more fundamental works cited by the authors, such as Lowry and Schwert (Journal of Financial Economics 2004).