Ranking Underwriters of European IPOs

Published date01 November 2014
Date01 November 2014
Ranking Underwriters of
European IPOs
Katrin Migliorati
Department of Economics and Technology Management, University of Bergamo, Italy
Silvio Vismara
Department of Economics and Technology Management, University of Bergamo, Italy and
CCSE, University of Augsburg, Germany
E-mail: silvio.vismara@unibg.it
Reputational capital is a valuable asset for underwriters in IPO markets. Existing
measures of their reputation are tailored to the US market, where the same
established investment banks typically handle IPOs on both the NYSE and
NASDAQ. The widely used CarterManaster rankings do not grade the reputations
of underwriters of 67.5% of IPOs in Europe. The European IPO market is a series of
domestic markets, where most underwriters operate almost entirely in a single
country. This paper presents Europeanbased rankings of 260 underwriters of
3,776 IPOs in France, Italy, Germany, and the UK from 1995 to 2010, with the
number of IPOs underwritten and the amount of capital raised.
Keywords: IPOs, underwriters, underpricing, AIM
JEL classification: G15, G24, G30
1. Introduction
The NYSE and Nasdaq vied for the Twitter listing in 2013 after the underwriters had been
. This gives an idea of an integrated underwriting market, with companies that are
going public selecting investment banks independently of, and even before, the listing
The original idea for this paper comes from a discussion with Jay Ritter, to whom we are
deeply indebted and grateful. We would like to thank an anonymous referee, Fabio Bertoni,
Luigi Buzzacchi, Thomas Chemmanur, Andrey Golubov, Dimitrios Gounopoulos, Arif
Khurshed, Erik Lehmann, Michele Meoli, Stefano Paleari, Renato Redondi, Andrea Signori
and participants at the 2012 CCSE Workshop and seminars at Cass Business School,
London Stock Exchange, University of Bergamo, University of Manchester, and University
of Surrey for helpful comments. Correspondence: Silvio Vismara
See, e.g., the Financial Times article of October 4, 2013 by A. Massoudi on US exchanges
ght for Twitters listing.
European Financial Management, Vol. 20, No. 5, 2014, 891925
doi: 10.1111/eufm.12049
© 2014 John Wiley & Sons Ltd
market. For this reason, researchers use a single classication of IPO underwriters in the
USA that encompasses NYSE and NASDAQ activities (Carter and Manaster, 1990;
Megginson and Weiss, 1991). In contrast, most IPOs in Europe involve local underwriters
or national championbanks, such as Mediobanca and Commerz Bank, which operate
almost entirely in a single country (Abrahamson et al., 2011). Their reputations are
supposedly high in domestic IPO markets, but lower abroad.
In this paper, we propose a Europeanbased ranking that proxies for underwriters
reputations better than existing measures. The widely used CarterManaster measure
ranks underwriters based on their placement in IPO tombstone announcements, which
are dealspecic underwriting lists based upon the number of shares underwritten. Such a
measure is not directly applicable to IPOs in Europe, where underwriting syndicates are
smaller and tombstone announcements no longer exist. Its indirect application would
exclude underwriters operating outside of the USA and overweight US banks.
Considering the population of 3,776 companies going public on the stock exchanges of
the four largest economies in Europe (namely, France, Germany, Italy and the UK) in the
period 19952010, we nd that only 32.5% were listed by underwriters that also took
companies public in the USA. Therefore, the CarterManaster ranking is unavailable for
the underwriters of most of the IPOs in Europe.
Differently from the USA, European stock exchanges are segmented (Vismara et al.,
2012). For instance, the investment bank Evolution Securities is the underwriter (NomAd,
Nominated Adviser) that took public more companies on Londons Alternative
Investment Market (AIM) in 19952010 (123 IPOs) than any other underwriter, though
it rarely operates outside the AIM. In a study of UK or European IPOs, the reputation of
such underwriters specialised in single, secondtier markets would appear to be negligible
if measured according to the money raised by these underwriters. Nevertheless, 77.5% of
IPOs in Europe in the last 15 years took place in thesesecondtier markets (Vismara et al.,
2012), where underwriters are often repeat players that take numerous small companies
Measuring the reputation of underwrit ers of European IPOs thus requires accountin g
for country specicities and exchange se gmentation. By testing differences in several
underwriterspecic variables and pe rforming propensity score matchin g analysis, we
build measures of underwritersr eputation in stock exchanges in the UK, France,
Germany, and Italy, differentiat ing the London AIM and Paris Marché Libre from other
markets. Regulatory factors under lie this specicity of the London AI M and Paris
Marché Libre. Espenlaub et al. (2012) an d Migliorati and Paleari (2013) highlig ht the
peculiar role of nancial intermediar ies in the London AIM; in this unreg ulated
reputational market,companies ar e taken public by NomAds, which act as
decentralised regulators certif ying and controlling the quality of new listings
show that most of these NomAds are young, sp ecialised nancial boutiques that do not
typically operate in Londons main ma rket or abroad, and that IPO underwritin g fees
Migliorati and Paleari (2013) compare the role of investment banks taking companies public
on the Alternative Investment Market (AIM) relative to those on secondtier regulated markets
in Continental Europe. Consistent with our ndings, they show that NomAds with higher
expertise in IPOs reduce underpricing to a larger extent. Ritter et al. (2013) investigate
European IPO activity IPOs over time, distinguishing second and main markets.
© 2014 John Wiley & Sons Ltd
892 Katrin Migliorati and Silvio Vismara
often comprise a signicantly large r portion of their revenues in comparis on with more
traditional investment banks.
To compare the validity of reputation measures, we perform a regression analysis of
IPO underpricing, controlling for rmspecic characteristics and endogeneity in
matching between issuer and underwriter. We nd a stronger effect on underpricing for
our fragmentedmeasure than for alternative measures of underwritersreputations, with
our high reputation underwriters associated with less underpricing. Traditional
information asymmetryrelated theories, indeed, view IPO underwriters as certifying
agents, who produce information about the IPO rm to alleviate the effects of information
asymmetries between rm insiders and outsiders (Carter and Manaster, 1990; Carter
et al., 1998). Accordingly, more reputable underwriters are associated with better
screening ability, higher issuer quality (Fernando et al., 2005) and nonspeculative issues
(Tinic, 1988). They are therefore able to select less risky issuers, which in turn experience
lower initialday returns (Chan et al., 2008; Dong et al., 2011).
However, Loughran and Ritter (2004) show that toptier underwriters were associated
with less underpricing in the 1980s, but more underpricing since then, especially during
the dotcom bubble. Liu and Ritter (2011) report that greater underpricing from toptier
underwriters has continued during 20012008. As an explanation, they formally develop
an agency model of IPO underpricing, where underwriters want the issuing rms to agree
to low offer prices and leave money on the table. Ritter (2011) offers a review of agency
based models of underpricing.
In this paper, we list the rankings, numbers of IPOs underwritten, and amounts of
capital raised for each of the 260 underwriters that took companies public in France, Italy,
Germany, and the UK in 19952010. This information is expected to be useful to
practitioners, when comparing investment opportunities in different European markets,
and to researchers investigating the pricing process or the performance of IPOs at a cross
country level, as pursued by a growing number of studies (e.g., Banerjee et al., 2011;
Bertoni et al., 2014; Bonardo et al., 2011; Engelen and van Essen, 2010; Meoli
et al., 2013; Torstila, 2001, 2003).
The remainder of this paper is structured as follows. In the next section, we present the
existing measures of underwritersreputations. The European IPO market is described
from the perspectives of companies going public and underwriters in sections and 4,
respectively. Section 5 develops our measure of reputation that is tested on underpricing
in Section 6. Section 7 concludes.
2. Measures of UnderwritersReputations
This paper focuses on the reputation of underwriters. The starting point of our analysis is
built on the argument that the reputation of investment banks plays a relevant role in
resolving information frictions in the new issues market (Beatty and Ritter, 1986;
Similarly, the Paris Marché Libre is an exchangeregulated market in which a single
specialised nancial boutique, Europe Finance et Industrie (now under liquidation), handled
most of the IPOs in 19952010 (164/260). No other investment bank took as many companies
public in Europe during this period. However, these IPOs were small, yielding a low proceeds
weighted reputation for this underwriter.
© 2014 John Wiley & Sons Ltd
Ranking Underwriters of European IPOs 893

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