Local underwriter oligopolies and IPO underpricing

We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.

► We develop a theory of IPO underpricing with competition on non-price dimensions.
► The IPO underwriting industry is characterized as a series of local oligopolies.
► We test our model on all-star analyst coverage, industry expertise, etc.
► We also develop the analyst lust theory of the underpricing of VC-backed IPOs.
► VC-backed IPOs that are covered by an all-star analyst are 20% more underpriced.