Determinants of Underwriter Participation in Initial Public Offerings of Common Stock: An Empirical Study

This paper examines an optimal underwriter participation model and develops testable hypotheses regarding the influence of certain factors on the degree of underwriter participation in initial public offerings (IPOs) of common stock. The issue of underwriter participation is important primarily due to the tradeoff between foregone underwriter compensation and underwriting risk reduction. The results of this paper indicate that factors related to the issue, issuing firm, underwriter, and IPO market conditions all are important determinants of the participation decision. Interestingly, the results also show that the importance of these factors is not consistent across underwriter prestige groups. In particular, factors external to underwriters (e.g., the issuing firm and market characteristics) are more important for explaining nonprestigious underwriter participation, while factors related to underwriters themselves play a more important role for explaining prestigious underwriter participation.     

Corporate Sales, Equity Trading, and Risk

This paper proposes and investigates an explanation for a positive association between the signed value of common share returns and trading activity. The mixture of distributions model for stock returns and trading is applied with the added assumption that product sales for a firm is the directing process which generates the flow of information to equity markets. Because trading depends upon information arrival, sales and trading are positively related. Also, because contribution margin is positive, cash flows increase with sales. Dependence of both cash flows and trading on sales implies that returns and trading are also positively related. This explanation is tested in this paper.