Initial public offering and market share of investment bank

Factors affecting market shares investment bank

  • Industry specialization: information spill-overs arise when several IPOs occur in the same industry over a reasonably short period of time. These information spill-overs lower the cost and improve the precision of IPO valuation. Thus, bank is likely to increase its market share if they focus on a particular industry.
  • Withdrawals of initial public offerings: withdrawals of IPOs after they are filed with the SEC is deemed to failed offerings. Typically, withdrawal is a negative signal for the offering bank since future issuers are less likely to use investment banks associated with past failures.
  • Analyst reputation: research or investment analysts play an important role in the underwriting business, thus, strong analysts is attractive to issuers. Since the issuers rely intensively of the research of analysts, a reputable analyst would ensure lower chance of issuing overpriced IPOs.
  • First day returns for initial public offering: potential investors in an IPO often face asymmetry of information; since insiders typically have better information of their company than investors. The firm could offer overpriced securities to investors. If investment banks are associated with overpriced offering, the market shares for the investment bank should decrease in the future since investors would be reluctant to trust the issuing from that bank.
  • Long run performance of initial public offering: a positive long run performance of IPO indicates that the IPO was initially under-priced, and a negative abnormal long-term IPO returns would indicate that the IPO was priced in the first place. The market share changes of investment bank would reflect accordingly to the long-run abnormal returns of its issuing IPOs. On the plus side, a bank’s reputation, hence its market share changes, would reflect positively if the bank evaluates and issues firms with good prospects. Since firms with good prospects should have positive abnormal long-run performance, thus, being associated with a good offering would boost the reputation of the bank.
  • Investment bank compensation: Firms that expect increased future business charge more for current offerings because more reputation is at risk. Thus, reduction in fees should have a positive impact on the prospects of less well-established banks. On the other hand, banks that expect increased future market share place more at risk in current offerings, and therefore, could charge higher fees.

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