Business Commons^™

Can Relationship Banking Reduce Firms' Ipo Underpricing, Kai Lu

Doctor of Business Administration Dissertations

IPO underpricing harms pre-existing shareholders and reduces the capital firms can raise to fund their growth. This paper shows that relationship banking can reduce IPO underpricing by decreasing information uncertainty. I develop a theoretical model showing that good firms – those with a lower dispersion of market value – are harmed and bad firms benefit from IPO price uncertainty when there is no borrowing and, thus, no distinguishing information on firm quality. When investors receive signals about firm value only from publicly observable transaction lending, good firms benefit while bad firms suffer. However, when firms have access to loans through …