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(Continued)Variables with significantly positive effects Variables with significantly negative effects
C. Market conditions
Prior cumulative market return Prior IPO activity
1999–2000 “Bubble” period Prior IPO activity∗best effort
Average IPO underpricing in the prior month Prior industry IPOs∗best efforts
Commercial banks allowed to underwrite securities Industry stock returns (filing to offer date)
Rule 10b-21 in force Negative industry stock returns (filing to offer date)
Global offering Out of pocket expenses
Estimated or actual underwriter spread Percentage secondary offer
Percent increase in shares outstanding and its
interactions with: (1) lowest market capitalization
quartile, (2) lowest stock price quartile, (3) highest
stock return standard deviation quartileAverage offer price revisions in prior 30 daysD. Share ownership
Venture capital backing CEO shareholdings∗Internet firm
Venture capitalist selling shares Issuer share ownership concentration; Investment
bank shareholdings; Investment bank
non-underwriter shareholdings; Commercial bank
shareholdings; Commercial bank underwriter
shareholdings; Venture capital backing; Venture
capital shareholdings; Corporate shareholdings;
Insurance company shareholder; Insider share sales;
CEO share sale; Venture capital share sales;
Commercial bank lenderAnother serious methodological issue is the extent to which various explanatory vari-
ables found to be correlated with underpricing and underwriter spreads are themselves
endogenously determined. In this category, underwriter ranking has been most exten-
sively studied andLjungqvist and Wilhelm (2003)andHabib and Ljungqvist (2001)
conclude that it is endogenously determined. Habib and Ljungqvist also find evidence
that the some of underwriting fees and out of pocket expenses, which they call pro-
motion costs are significantly related to underpricing and endogenously determined as
well. Habib and Ljungqvist also test whether number of shares sold is endogenously
determined and conclude that is not.
Another explanatory variable that is often used in explaining underpricing is the price
revision from the filing range midpoint, measured by the offer price minus the midpoint,
divided by the midpoint. Since underpricing is also a non-linear function of offer price,
there is a danger that this strong empirical association is being driven mechanically by
the common component in the two measures.