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