Ranking Underwriters of European IPOs

• Published date: 01 November 2014
• Date: 01 November 2014
• DOI: http://doi.org/10.1111/eufm.12049

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

Abstract

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 Carter‐Manaster 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 European‐based 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

chosen

1

. 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

1

See, e.g., the Financial Times article of October 4, 2013 by A. Massoudi on ‘US exchanges

fight for Twitter’s listing’.

European Financial Management, Vol. 20, No. 5, 2014, 891–925

doi: 10.1111/eufm.12049

© 2014 John Wiley & Sons Ltd

market. For this reason, researchers use a single classification 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 champion’banks, 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 European‐based ranking that proxies for underwriters’

reputations better than existing measures. The widely used Carter‐Manaster measure

ranks underwriters based on their placement in IPO ‘tombstone announcements’, which

are deal‐specific 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 over‐weight 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 1995–2010, we find that only 32.5% were listed by underwriters that also took

companies public in the USA. Therefore, the Carter‐Manaster 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 London’s Alternative

Investment Market (AIM) in 1995–2010 (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, second‐tier 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 thesesecond‐tier markets (Vismara et al.,

2012), where underwriters are often repeat players that take numerous small companies

public.

Measuring the reputation of underwrit ers of European IPOs thus requires accountin g

for country specificities and exchange se gmentation. By testing differences in several

underwriter‐specific variables and pe rforming propensity score matchin g analysis, we

build measures of underwriters’r 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 specificity 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 financial 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

2

.We

show that most of these NomAds are young, sp ecialised financial boutiques that do not

typically operate in London’s main ma rket or abroad, and that IPO underwritin g fees

2

Migliorati and Paleari (2013) compare the role of investment banks taking companies public

on the Alternative Investment Market (AIM) relative to those on second‐tier regulated markets

in Continental Europe. Consistent with our findings, 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 significantly large r portion of their revenues in comparis on with more

traditional investment banks.

3

To compare the validity of reputation measures, we perform a regression analysis of

IPO underpricing, controlling for firm‐specific characteristics and endogeneity in

matching between issuer and underwriter. We find a stronger effect on underpricing for

our ‘fragmented’measure than for alternative measures of underwriters’reputations, with

our high reputation underwriters associated with less underpricing. Traditional

information asymmetry‐related theories, indeed, view IPO underwriters as certifying

agents, who produce information about the IPO firm to alleviate the effects of information

asymmetries between firm 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 non‐speculative issues

(Tinic, 1988). They are therefore able to select less risky issuers, which in turn experience

lower initial‐day returns (Chan et al., 2008; Dong et al., 2011).

However, Loughran and Ritter (2004) show that top‐tier 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 top‐tier

underwriters has continued during 2001–2008. As an explanation, they formally develop

an agency model of IPO underpricing, where underwriters want the issuing firms 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 1995–2010. 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 underwriters’reputations. 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 Underwriters’Reputations

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;

3

Similarly, the Paris Marché Libre is an exchange‐regulated market in which a single

specialised financial boutique, Europe Finance et Industrie (now under liquidation), handled

most of the IPOs in 1995–2010 (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

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