The Journal of Finance

Initial Public Offerings and Underwriter Reputation

Published: 09/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb02426.x

RICHARD CARTER, STEVEN MANASTER

This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.

Underwriter Reputation, Initial Returns, and the Long‐Run Performance of IPO Stocks

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.104624

Richard B. Carter, Frederick H. Dark, Ajai K. Singh

We find that the underperformance of IPO stocks relative to the market over a three‐year holding period is less severe for IPOs handled by more prestigious underwriters. Consistent with prior studies, we also find that IPOs managed by more reputable underwriters are associated with less short‐run underpricing. Among the various existing proxies for underwriter reputation, the Carter–Manaster measure is the most significant in the context of initial returns and also in the context of the three‐year performance of IPOs. The study also provides an updated list of the Carter–Manaster measure for various underwriters.