Strategic underwriting and industry conditions in initial public offers

This study presents three essays in financial economics. Section I presents a rational model of strategic underwriting in which underwriters compete for and price IPOs. The model explains three IPO pricing anomalies: (1) IPO underpricing, (2) the partial adjustment phenomenon, and (3) the tendency of some underwriters to persistently underprice more than others (holding size and industry constant). New empirical evidence documenting underwriter specific persistence in residual initial returns supports the model. I also present a new measure of underwriter reputation based on past initial returns that, unlike existing measures based on underwriter size or tombstone placements, is among the most significant predictors of future initial returns. Large underwriters with high rankings later experience superior market share growth.; Section II presents new evidence that past industry conditions can predict future IPO underpricing; long-term IPO performance; and IPO volume. Moreover, the impact of industry conditions is economically large. With respect to initial returns, the state of a given industry can be summarized by a long-term component and a short-term component. After controlling for hot markets and several variables known to predict initial returns, we find that high underpricing industries are those with (1) lower leverage, (2) higher share turnover, (3) lower book to market ratio, and (4) smaller size. Furthermore, after controlling for variables known to predict long-term IPO performance, we find that IPOs in industries with (1) lower concentration and (2) lower leverage experience superior performance in the three years following their IPO. We also find that industries with higher concentration experience higher future IPO volume. Results related to industry concentration and industry leverage are most noteworthy.; Though several studies document that past returns and past trading volume predict weekly US stock returns, section III of this study considers two new variables: the past number of trades signed as purchase and sale. These variables also predict weekly stock returns and contain information that is distinct from past returns and past trading volume. Combined trading strategies modestly outperform strategies based on past returns and past trading volume alone. A form of market inefficiency, lagged information dissemination, best explains the predictive power of the past number of signed trades. It cannot be explained by overreaction, self-attribution or systematic risk. I also find that the return predictability varies across exchanges and after tick size reductions.