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Federal Reserve Bank of Chicago

Conflict of Interest and Certification
in the U.S. IPO Market
Luca Benzoni and Carola Schenone

WP 2007-09

Conflict of Interest and Certification
in the U.S. IPO Market
Luca Benzoni and Carola Schenone∗
July 2007

∗

Luca Benzoni is at the Federal Reserve Bank of Chicago, 230 S. LaSalle Street, Chicago, IL 60604, 312-322-

8499, lbenzoni at frbchi dot org. Carola Schenone is at the Finance Department, McIntire School, University of
Virginia, Monroe Hall, 248 McCormick Road, Charlottesville, VA 22903, 434-924-4184, schenone@virginia.edu.
We are grateful to Raj Aggarwal; Torben Andersen; Brad Barber; Robert Bliss; Federico Ciliberto; Cristina
De Nardi; Rick Green; Charlie Hadlock; Ravi Jagannathan; Nisan Langberg; Ross Levine; Bob McDonald;
Mitchell Petersen; Nagpurnanand Prabhala; Todd Pulvino; Manju Puri; Bill Rogerson; Bill Schwert; Raj Singh;
Georgios Skoulakis; Clifford Smith; Laura Starks; Anjan Thakor; Sheridan Titman; Elizabeth Odders-White;
Bill Wilhelm; Andy Winton; and to seminar participants at the Chicago FED; Georgetown University; the
Instituto y Universidad Torcuato Di Tella; the University of Colorado at Boulder; the University of Minnesota;
the Darden Graduate School of Business Administration and the McIntire School of Commerce at the University
of Virginia; Northwestern University; the 2004 WFA conference; and the 2005 European Economic Association
meeting for helpful comments and suggestions. Carola Schenone gratefully acknowledges support from the
McIntire School of Commerce Summer Research Grant. Of course, all errors remain our sole responsibility.
The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of
Chicago or the Federal Reserve System. Previous versions of this paper were circulated under the title “Conflict
of Interest or Certification? Evidence from IPOs Underwritten by the Firm’s Relationship Bank.” The most
recent version of this paper can be downloaded from http://ssrn.com/abstract=603982.

Conflict of Interest and Certification
in the U.S. IPO Market
Abstract
We examine the long-run performance and valuation of IPOs underwritten by relationship banks. We find that over one- to three-year horizons these IPOs do not underperform
similar stocks managed by independent institutions. Moreover, our analysis suggests that
relationship banks avoid potential conflicts of interest by choosing to underwrite their
best clients’ IPOs. Consistent with this result, we show that investors value new issues
managed by relationship banks higher than similar IPOs managed by outside banks. Our
findings support the certification role of relationship banks and suggest that the effect of
the 1999 repeal of Sections 20 and 32 of the Glass-Steagall Act has not been negative.

1

1

Introduction

There has been an extensive debate in the United States regarding the costs and benefits of
participation by commercial banks in the securities underwriting business. When banks lend
to firms they acquire proprietary firm-specific information about their clients (e.g., Diamond
(1991), Rajan (1992), and Stein (2002)). A more informed bank can effectively certify a firm’s
value and facilitate the underwriting of its client’s securities, especially IPOs. However, a
lending bank’s informational advantage presents a conflict of interest since a bank that has
a stake in a firm has incentives to promote the overpriced issuance of a junior claim. This
paper adds to the debate along two dimensions. First, we study the long-run performance of
IPOs underwritten by commercial banks. We find that over one- to three-year horizons these
IPOs do not underperform similar stocks managed by independent underwriters. Second, we
examine the selection of IPOs that go public with their relationship bank. Our results suggest
that relationship banks avoid potential conflicts of interest by choosing to underwrite their
best clients’ IPOs. Consistent with this conclusion, we show that investors value new issues
managed by relationship banks higher than similar IPOs managed by outside banks.
The 1933 Glass-Steagall Act addressed the potential conflict of interest by banning commercial banks from the market for corporate securities underwriting (Sections 20 and 32 of the
Act). Over the past two decades this restriction has been relaxed. The deregulation process
begun in 1987 when regulators reinterpreted Section 20 of the Glass-Steagall Act and allowed
some banks, such as JP Morgan and Bankers Trust, to set up Section 20 subsidiaries which
can underwrite corporate securities (e.g., Puri (1999)). This process culminated in the 1999
Gramm-Leach-Bliley Financial Modernization Act, which brought down the ‘firewalls’ that
limited information, resource, and financial linkages between Section 20 subsidiaries and their
parent holding companies as well as with their commercial banking affiliates.
Motivated by these policy developments previous studies have investigated the conflictof-interest and certification debate by examining the underwriting of bonds. For instance,
Kroszner and Rajan (1994), Puri (1994, 1996) provide evidence based on bond issues underwritten prior to the enactment of the Glass-Steagall Act. Gande et al. (1997) use data on bond
issues from January 1993 to March 1995. Consistent with the certification view, Puri (1996)
and Gande et al. (1997) find that debt issues managed by commercial banks exhibit relatively
higher prices, and further, Puri (1994) shows that bank underwritten issues defaulted less than
non-bank underwritten issues. Also consistent with the certification role of banks, Kroszner
and Rajan (1994) find that bond issues underwritten by commercial banks had default rates
lower than similar issues managed by investment banks.
Here we consider a new sample, IPOs underwritten by the firm’s commercial bank during

2
the period from 1998 to 2000, and present additional evidence that helps understand the consequences of bringing down the commercial-investment bank firewalls. By combining different
data sources, we identify the firm’s pre-IPO bank (referred to as the ‘relationship bank’ in this
article), the IPO underwriters, and the firm’s characteristics. As such, we can precisely identify
the IPOs that were underwritten by a bank subject to a potential conflict of interest.
We focus on two sets of tests. First, we study whether IPOs underwritten by relationship
banks exhibit abnormal long-run returns compared to equity issues underwritten by independent banks. This analysis adds to Schenone (2004) who focuses on the short-run performance
of IPOs that had a relationship with a prospective underwriter. Second, we examine the selection of IPOs that go public with their relationship banks. In particular, we study whether
relationship banks avoid underwriting the IPOs of their low-value clients, which are typically
higher-risk IPOs that could expose the bank to a conflict of interest. This work also adds to
Schenone (2004), who studies IPO valuation but does not examine the selection of firms that
go public with their bank.
The first part of our long-run performance study focuses on the cross-section of buy-andhold abnormal returns (BHARs). We start out by computing mean BHARs, with holding
periods from one to three years, for stocks managed by a relationship bank. For each of these
IPOs we identify a matching stock which has similar risk characteristics but was managed by
an independent underwriter. We do not find significant differences in performance between the
returns on the two samples of stocks. This result is robust across the different benchmarks that
we use to compute abnormal returns and across holding periods.
Fama (1998) warns that the results of a long-run performance study based on buy-andhold abnormal returns should be interpreted with caution. Concerns arise from systematic
errors due to imperfect expected return proxies (the ‘bad-model’ problem), the skewness of
individual-firm long-horizon BHARs, and the cross-sectional correlation of BHARs that overlap
in calendar time. We attempt to address these issues. To limit the bad model problem, we
consider benchmark portfolios that are similar to the IPO stocks on characteristics known to
be related to average returns. We focus on portfolios of stocks ranked by size and book-tomarket, but we also examine industry-ranked portfolios and different market indeces (S&P 500,
Nasdaq, as well as NYSE, AMEX, and NASDAQ stocks). Further, we consider a logarithmic
transformation of the BHAR variable to address the asymmetry problem. More importantly, to
deal with calendar-time dependence we estimate the cross-sectional correlations of the BHARs
with daily returns data, and we use these estimates to conduct inference. We reach the same
conclusion that the two samples of IPOs performed similarly, except for some evidence that
IPOs underwritten by relationship banks in year 1999 did better at the one-year horizon.
Although we attempt to eliminate the effect of cross-sectional correlation there could be

3
legitimate concerns that our approach to do so may still be inadequate. As such, in the
second part of our long-run analysis we follow a calendar-time approach (e.g., Fama (1998)).
Specifically, we consider a zero-cost investment strategy that entails a long position in the
IPOs underwritten by relationship banks and a short position in ex-ante similar stocks that
have been taken public by an outside bank. We compute equal- and value-weighted returns on
such portfolio with holding periods of one, two, and three years. We test the performance of
this strategy using a linear model which includes a market factor, the Fama and French (1993)
HM L and SM B factors, and a momentum factor (Jegadeesh and Titman (1993) and Carhart
(1997)). We still reach the conclusion that IPOs underwritten by relationship banks do not
underperform the stocks in the control sample.
Finally, in the last part of the paper we investigate whether there is self-selection among the
firms that go public with their relationship bank. Self-selection could arise because relationship
banks might shy away from underwriting the IPOs of their low-value clients, which are typically
higher risk IPOs that could expose the bank to a conflict of interest. This effect is further
reinforced because high-value firms might have an incentive to go public with their bank, which
is in a position to certify the true worth of their stock. When certification prevails over conflicts
of interest, the effect of such selection is that the average market value of the firms underwritten
by relationship banks is no lower than that of firms taken public by independent banks. We
consider a model that accounts for firm-bank selection and we study firm valuation. We find
that the outcome of going public with a relationship bank is not random. Further, we show
that the value of firms that go public with their bank is higher than the value of firms that go
public with an outside institution. These results point towards the certification hypothesis.
The remainder of the paper is organized as follows. In Section 2 we discuss how we construct
the data set and the relevant variables while Section 3 contains the analysis. Section 4 addresses
the interpretation of our results and concludes.

2
2.1

Data
Sample selection

Sections 20 and 32 of the Glass-Steagall Act were officially repealed on November 12, 1999 with
the enactment of the Gramm-Leach-Bliley Act. However, the move towards universal banking
started in 1987 (see Puri (1999)) when the Federal Reserve Board granted permission to three
banks to underwrite and deal in tier-one securities, i.e., municipal revenue bonds, mortgagebacked securities, commercial paper, and consumer-receivables-related securities. In 1989, the
Board expanded the underwriting powers of five commercial banks to include tier-two securities,

4
i.e., corporate debt and equity. Subsequently, and on a case-by-case basis, the Federal Reserve
granted commercial banks permission to establish ‘Section 20 subsidiaries,’ which could engage
in those underwriting activities that Section 20 of the Glass-Steagall Act considered ineligible.
Still, these subsidiaries were subject to various firewalls that limited the flow of information,
resources, and revenues between the subsidiary and the parent bank’s holding company, as well
as with the commercial bank affiliate.
These firewalls began to tumble in the late 1990s. For example, at the end of 1996 the Federal
Reserve substantially increased the revenue cap on Section 20 subsidiaries and dropped many
of the firewalls that limited information flows. Before 1998, the activity of commercial banks
and their Section 20 subsidiaries in underwriting equity issues was very limited. Gande, Puri,
and Saunders (1999) compute the share of the annual dollar volume and number of U.S. equity
issues underwritten by Section 20 subsidiaries of commercial bank holding companies, and
conclude that “to date, commercial banks have made little inroads into the equity underwriting
market.” Hence, our sample of IPO firms begins on January 1, 1998, when enough IPOs were
underwritten by Section 20 subsidiaries to validate empirical analysis.
Our sample period ends on December 31, 2000. Firms that went public between 1998
and 2000 established their pre-IPO banking relationships without knowing that the GrammLeach-Bliley Financial Modernization Act would have opened the way to IPO underwriting
by commercial banks. As such, there is no self-selection of a pre-IPO lender in our sample, a
result that is consistent with the findings of Schenone (2004). However, after year 2000 firms
are likely to strategically choose a pre-IPO banking relationship with a potential underwriter
(see, e.g., Drucker (2005) for related evidence), which would create a bias in the results due to
the self-selection problem. Thus, we do not include IPOs on or after 2001.
The IPO selection criteria are as follows. We exclude ADRs, closed-end funds, REITS,
financial institutions, private placement, rights and unit issues. We also exclude IPOs in which
the contract between the underwriter and the issuing firm does not entail firm commitment.
This selection results in 1,245 firms.
We use the Securities Data Corporation (SDC) database to obtain the list of issuing firms,
the offer date, information on whether they were venture-backed, the list of lead underwriters,
the book managers, and the set of all underwriters. We cross-check this information with that in
the IPO’s last amended prospectus filed with the Securities and Exchange Commission (SEC).
We also use the prospectus to gather firm characteristics reported in the balance sheet, income
statement, and cashflow statement for the IPO year (or the previous one) and, if available, for
the year in which the firm and the bank established their relationship.
To be included in our sample, the issuing firms must have at least one pre-IPO banking
relationship within five years prior to the IPO reported in Dealscan. The Dealscan database

5
is compiled by the Loan Pricing Corporation, and contains detailed information on syndicated
loan contract terms, the identity of the loan’s lead arranging bank as well as all other participants, as well as other loan characteristics (such as loan purpose and type). The primary
sources of data for Dealscan are attachments on SEC 10-K filings and reports from the lending
institutions. The minimum cutoff loan amount needed for Dealscan to record a loan is $100,000.
Thus, the firms in our sample have at least one loan of $100,000 or more. Furthermore, we
exclude the firms that report either less than a whole year of financial data or only pro-forma
financial statements for the IPO year (or the previous one). These last two requirements restrict
our sample to 306 firms. We report summary statistics on their characteristics in Table 1.
We use COMPUSTAT data to examine the characteristics of the excluded firms. For each
company we record the first entry in the database, which corresponds to either the IPO year
or the first data year available in the prospectus (if the prospectus included pre-IPO data and
COMPUSTAT backfiled that data within a three-year period prior to the IPO date). Compared
to the IPOs in the sample, excluded firms are smaller. For instance, mean current assets are
$15.75 million for excluded firms vs. $20.97 million for sample IPOs. Average sales are $334.32
million, lower than the $481.98 million for sample IPOs. Mean underpricing (which correlates
negatively with firm size, e.g., Beatty and Ritter (1986)) is 56.65% vs. 45.13%. Further, mean
long-term debt and debt due in one year are $95.92 and $9.09 million, respectively, compared
to $144.34 and $11.16 million for sample firms. Thus, the stake of a bank in these stocks is
smaller, which makes these firms less exposed to conflicts of interest (Puri (1999)). Also, for
these firms we cannot always determine whether there was a relationship bank which could, or
did, take them public. As such, we cannot determine whether a potential conflict of interest
existed. In contrast, the companies we investigate are a homogeneous sample of firms that have
received a significant stake from their relationship bank, and are therefore more highly affected
by the costs and benefits of going public with their bank.
The requirement that the firms in our sample have at least one banking relationship reported
in Dealscan prior to the IPO includes direct lending relationship (the bank lent its own funds
to the firm) as well as underwriting relationship (the firm has a relationship with a bank that
previously managed the firm’s private or public debt placement). Both types of relationship
can lead to certification or conflicts of interest if the relationship bank manages the firm’s IPO.
In the case of lending relationships, the lending bank monitors and audits the firm closely, so it
will generate information that the bank can use to accurately certify the value of the firm’s new
issue. But because the bank has lent to the firm, it is also more likely to fall prey to conflicts
of interest when underwriting the firm’s IPO. In the case of underwriting relationships, the
bank has its reputation capital at stake. Since the bank sells the firm’s debt on the market
(public issue) or to a group of private investors (private placement), the bank has an incentive

6
to protect the interest of the investors who purchased such debt. As such, it might also have
an incentive to over-represent the value of its client firm value when underwriting its IPO.

2.2

Pre-IPO lending relationship variables

We separate firms that went public with at least one of their relationship banks (flagged with
a binary variable Certify = 1) and firms that did not go public with any of their relationship
banks (for which we code Certify = 0).
In doing so, we carefully track the linkage between Section 20 subsidiaries that underwrote
the IPOs and the commercial bank (or bank holding company) to which such subsidiary belonged. Specifically, for each Section 20 subsidiary, we record the date on which the Board
of Governors granted the bank holding company initial approval, as reported on the Board
of Governors site at http://www.federalreserve.gov/generalinfo/subsidiaries/. For Section 20
subsidiaries that are not listed on the Board of Governors site we obtained information by
contacting the Federal Reserve Bank of Philadelphia. Before that date, commercial banks were
not authorized to underwrite their clients’ securities issues.
We also track whether the firm’s relationship bank merged with a bank that had underwriting abilities before (or after) the firm’s IPO. That is, for each IPO we check whether the firm’s
relationship bank had an authorized Section 20 subsidiary operating at the time of that IPO. If
such Section 20 subsidiary, or another relationship bank with underwriting powers, underwrote
the IPO we code Certify = 1. The list of bank mergers is in Figure 1, page 310, of Ljungqvist,
Marston, and Wilhelm (2004).

2.3

Stock returns

We collect return data from the Center for Research in Security Prices (CRSP) database. We
follow each firm from its stock’s second trading day or, if that is not available, from the first
day on which stock returns become listed in the CRSP files, i.e., date tstart (we separately study
buy-and-hold returns inclusive of the first-trading-day return). The holding period ends after
T years or on the stock’s delisting date, whichever comes first, i.e., date min(T, tdelist ), where
T = 1, 2, and 3 years. This approach yields buy-and-hold returns


min(T,tdelist )
Y
Ri,T = 
(1 + ri,s ) − 1 ,

(1)

s=tstart

where for each firm i, ri,s is the day-s return inclusive of distributions and adjusted for stock
splits.

7
For each stock i, we also compute buy-and-hold returns on two benchmark portfolios:


min(T,tdelist )
Y
RPi ,T = 
(1 + rPi ,s ) − 1 ,
(2)
s=tstart

where rPi ,s is the day-s return on one of two alternative portfolios.
The first, most relevant, benchmark is determined by the returns on 100 portfolios of stocks
ranked by size and book-to-market. The portfolios, constructed at the end of each June, are
the intersections of ten portfolios formed on size (market equity, ME) and ten portfolios formed
on the ratio of book equity to market equity (BE/ME). We obtained daily returns on these
portfolios from Ken French’s data library. We pair each stock i with the benchmark portfolio
that has the closest ME and BE/ME. We also consider four alternative benchmarks that are
commonly used in the literature. They are the return on the CRSP value-weighted market
portfolio inclusive of all distributions; the return on the S&P500 and Nasdaq indices inclusive
of distributions; and return on the 49 industry-ranked portfolios, also from Ken French’s data
library.

3

Empirical Predictions and Analysis

We briefly review the two competing theories, certification and conflict of interest, in Section 3.1.
Then in the rest of the section we formulate and test their predictions. In Section 3.2 we examine
the predictions for buy-and-hold abnormal returns in an event-time long-run performance study,
while in Section 3.3 we follow a calendar-time approach. Section 3.4 deals with the selection of
firms that go public with their bank.

3.1

Certification and conflict of interest

Puri (1999) argues that commercial banks, as lenders to firms, can obtain better prices for
securities issues than investment houses particularly when costs of information production are
high. Similarly, Kroszner and Rajan (1994) note that banks may have firm-specific information
which would give them an advantage over investment banks in underwriting more informationsensitive securities. Puri (1996) finds evidence that supports these predictions in her study
of bond issues, i.e., she shows that there is a higher net certification effect for more junior
securities.
As such, IPOs underwritten by commercial banks are an interesting data set to investigate
the conflict-of-interest and certification debate. First, the pricing of equity is more informationsensitive than the pricing of debt. Thus, an inside bank can play an even more important role
in resolving asymmetric information problems when underwriting its client’s equity. Second,

8
since equity is junior to debt, equity holders face a much higher risk of expropriation than debt
holders do. Therefore the costs associated to potential conflict of interest are higher too.
The certification theory states that relationship banks that manage their clients’ IPOs use
their proprietary firm-specific information to price these stocks more accurately than an uninformed bank with no ties to the firm. Further, relationship banks have an incentive to avoid
the underwriting of low-value clients, which are typically higher-risk IPOs that could expose
the bank to a conflict of interest. This selection mechanism is reinforced because high-value
firms also have an incentive to go public with their bank, which is in a position to certify the
high value of their stock. In contrast, low-value firms are indifferent between staying with their
bank (which would only take them public at a low price) or switching to an outside underwriter
(which would infer the firm is low value and therefore would place it at a low price).
The conflict-of-interest theory states that relationship banks that manage their clients’
IPOs use their proprietary firm-specific information to fool the public into buying overpriced
securities. Further, banks do not shy away from underwriting the IPOs of their low-value firms.
There is no selection in the firm-underwriter match, nor any difference in the valuations of
IPOs underwritten by their bank and stocks taken public by independent banks.

3.2

Event-time analysis of the buy-and-hold abnormal returns

If certification prevails, IPOs underwritten by relationship banks are priced accurately. Thus,
a testable prediction of the certification theory is that there should be no long-run underperformance for these stocks. However, the joint-hypothesis problem of testing this condition
along with a certain asset pricing model for expected returns clouds the interpretation of the
test’s results. Here, our preferred approach is to measure the abnormal return as the difference
between the event firm’s return and the return on a portfolio of stocks that are similar on market
size and book-to-market. These characteristics are know to be related to average returns (e.g.,
Fama and French (1992), Daniel and Titman (1997), Daniel et al. (1997)). There may still be
a concern that this approach does not fully control for cross-firm variation in average returns
due to differences in expected returns and to chance sample-specific patterns in average returns
(e.g., Fama (1998)). As such, in our tests we focus on the difference in BHARs between IPOs
underwritten by relationship banks and a matching sample of stocks with similar characteristics.
Specifically, we test the null
H0 : There is zero difference between the BHARs on stocks that went public with a relationship
bank and the BHARs on stocks taken public by an independent underwriter
against the alternative that the BHARs are different.

9
3.2.1

Matching criteria

For each IPO issued by the firm’s relationship bank, we identify a matching firm that is brought
to the market by an independent bank. We start by looking for a matching firm’s IPO that has
been issued within seven days prior to the IPO date of the stock managed by its relationship
bank. We rank the candidate matches that satisfy this requirement by the value of their
BE/ME, and we identify the stock that has a book-to-market ratio closest to, but higher than,
that of the IPO originated by the relationship bank.1
We favor matching stocks with higher book-to-market ratios because they typically yield
higher returns. That is, we bias the results of the long-run performance analysis against the
prediction of the certification theory, which is our null hypothesis. Although we would also
like to match stocks by size, as measured, e.g., by market value of equity, due to the limited
number of firms in our sample we do not simultaneously match by size and book-to-market.
We do however repeat the analysis by matching IPOs on market size and IPO date only, and
find similar results.
If the BE/ME ratios of the two paired firms are within a narrow range, we finalize the
match. If not, we keep looking for a match among the firms that went public within two
weeks prior to the IPO date of the stock managed by the relationship bank; we follow the
same strategy, except that we accept firms that are in a slightly wider BE/ME range. If we
are still unsuccessful, we continue to expand the issuing window, up to three months. With
this approach, we efficiently find matching firms that typically went public within a month and
have a BE/ME ratio close to that of the stock to which they are paired. Only a very limited
number of matches fall within the wider three-month window.
If a matching company is delisted before its corresponding stock is issued by a relationship
bank, then after its delisting date we use a similar strategy to replace it with a substitute
match. If the substitute match is also delisted, we look for yet another substitute, and so on.
3.2.2

Empirical findings

First, we follow Ritter (1991) and examine wealth relatives. We compute the average buy-andhold return across the stocks underwritten by relationship banks, RT,S , and the average return
on stocks in the matching sample, RT,M . The wealth relative is the ratio (1 + RT,S )/(1 + RT,M ).
Table 2 reports the results for different holding periods and matching criteria. In all cases,
wealth ratios are larger than one when the holding period is one year. Wealth ratios remain
1

Our matching criteria are similar to those used in other studies that investigate the long-run performance

of IPOs and seasoned equity offers (e.g., Eckbo, Masulis, and Norli (2000), and Loughran and Ritter (1995)).
However, there is a significant difference. In our study, the matching firms are themselves IPO stocks. This is
why we look for a match whose IPO date is close to that of the stock issued by the relationship bank.

10
higher than one at longer holding periods except for the case in which we use the book-to-market
ratio as a matching criterion and returns are equally weighted. Overall, these results provide
some mixed evidence that IPOs underwritten by relationship banks did not underperform
similar stocks taken public by independent banks.
Next, we consider the BHARs variable
BHARi =

Ri,T
RPi ,T
−
,
T
T

(3)

where RPi ,T is the buy-and-hold benchmark portfolio return and the holding period T is one,
two, or three years. It is well known that the skewness of BHARs can bias the inference in
a long-run performance study (e.g., Barber and Lyon (1997), Brav (2000), Brav et al. (2000),
Eberhart and Siddique (2002), Fama (1998), Ikenberry et al. (1995), Kothari and Warner
(1997 and 2006), Loughran and Ritter (2000), and Mitchell and Stafford (2000)). As a partial
remedy to the problem, here we conduct inference based on the bootstrapped skewness-adjusted
t-statistics of Lyon, Barber, and Tsai (1999).2
Table 3 contains results for the case in which stocks are matched by IPO date and bookto-market ratio. The matching criterion based on the market value of equity yields similar
results, available from the authors on request. Throughout the table we use a yearly decimal
scaling. As such, a mean abnormal return of, e.g., 0.01 indicates that the stocks in that portfolio
outperformed the benchmark by 1% per year.
When returns are equally weighted, the abnormal return on both sample and matching
stocks is insignificant, i.e., both samples of stocks were priced accurately. The difference between
mean returns on stocks in the sample and in the matching group is also insignificant. This
findings holds regardless of the benchmark and the holding period considered (Panel A). We
reach similar conclusions when we break down stocks by IPO year, except that we find some
evidence that 1999 IPOs underwritten by their bank did better than the other stocks at the one
year horizon (Panel C). At longer maturities, however, any difference in performance dissipates.
Economically, the difference in performance is 18 percent per year when the benchmark is the
return on a portfolio of stocks ranked by size and book-to-market and the holding period is
one year from the IPO date (Panel A, FF row, column 3). This figure drops to negative nine
percent per year when the holding period increases to three years (Panel A, FF row, column
9).
Similar conclusions apply to the case in which returns are value weighted, except that IPOs
taken public by their bank have underperformed all benchmarks at the one year horizon (Panel
2

Specifically, we compute the skewness adjusted t-ratio in equation (5), page 174 of Lyon, Barber, and Tsai

(1999). We calculate the transformed test statistics in equation (6), page 174, for 10,000 resamples each of size
1/2 of the original sample of BHARs (resamples of size 1/4 give similar results). We compute critical values
from the 10,000 realizations of such transformed test statistics.

11
B). This result is mainly driven by the relatively poor performance of IPOs that went public in
1999 (Panel D). However, when compared to the stocks in the matching sample we do not find
a significant difference in performance (Panels B and D). Economically, the abnormal returns
on the long-short strategy are approximately 10% for the one-year holding period and they
decrease to a few percentage points per year over longer horizons (Panel B).
Overall, this analysis suggests that IPOs underwritten by their relationship bank did not
underperform the control sample of stocks. In unreported results we also repeat the analysis
by including the first-trading-day return to the total return measures in equations (1) and (2).
We reach the same conclusion. This is consistent with Schenone (2004), who shows that IPO
underpricing does not depend on whether a firm goes public with its bank.
3.2.3

Correcting cross-sectional correlation and skewness biases

The skewness-adjusted statistics that we employed in Section 3.2.2 do not fully correct for
the correlation of event-firm abnormal returns that overlap in calendar time. It is well known
that ignoring this problem is likely to produce overstated test statistics (e.g., Brav (2000),
Fama (1998), Kothary and Warner (2004), and Mitchell and Stafford (2000)). As such, here
we attempt to deal with the cross-sectional dependence and the skewness of individual-firm
long-run BHARs by following an alternative approach.
First, we consider a different measure of BHARs. For an IPO i, we define
µ
¶
1 + Ri,T
BHARi = log
.
1 + RPi ,T

(4)

As the holding period T shrinks to zero, this measure converges to the BHAR definition (3).
Further, it retains some of the intuitive appeal of the more conventional BHAR definition (3),
in that it is a monotonic transformation of a ratio which ‘represents the investor experience’
(Lyon et al. (1999)). One advantage, however, is that at longer horizons the skewness problem
is considerably attenuated when we use definition (4). This is evident from Figure 1, which
shows that for all holding periods the empirical distribution of the BHARs is much more
symmetric when we use definition (4). Table 4 compares skewness and kurtosis for the two
BHAR variables. When we use definition (4) we find values that are much closer to zero and
three, respectively, which are the benchmarks for a standard normal distribution.
Consider now the cross-sectional regression
µ
¶
1 + Ri,T
log
= β 0 + β Certify Certifyi + εi .
1 + RPi ,T

(5)

Ordinary least squares estimates of β 0 and β Certify would yield estimates of the mean BHAR for
IPOs underwritten by relationship and independent banks. However, conventional t-ratios, even

12
if computed with a bootstrapping procedure, would be contaminated by the cross-dependence
problem. To deal with this problem we estimate the regression (5) by generalized least squares
(GLS). For this application we need an estimate for the covariance matrix of the error term ε,
which we calculate as shown below.
For each pair of stocks i and j we estimate the covariances of the dependent variables in
(5) with high-frequency, daily data:
¶
µ
¶¶
µ µ
1 + Rj,T
1 + Ri,T
d
, log
=
(6)
Cov log
1 + RPi ,T
1 + RPj ,T
¶¶¶ µ µ
¶
¶¶¶
µ µ
µ µ
X µ µ 1 + ri,t ¶
1 + rj,t
b log 1 + ri,t
b log 1 + rj,t
log
−E
× log
−E
,
1 + rPi ,t
1 + rPi ,t
1 + rPj ,t
1 + rPj ,t
t ∈ Ωi,j

where ri,t and rj,t are the day-t total returns on stocks i and j, respectively; Ωi,j is the set of
b
overlapping trading dates in the buy-and-hold periods of stocks i and j; and E(•)
denotes the
sample mean of a random variable.
We require a minimum of three months of overlap in the buy-and-hold periods of any stock
pair i and j to estimate the covariance in (6). If Ωi,j is shorter than three months, we fix the
cross-sectional covariance between stocks i and j at zero. We obtain the variance estimate for
any stock i by setting i = j in (6). In that case, the overlapping trading window Ωi,i coincides
with the entire buy-and-hold period for that stock i.
As the intra-period return frequency increases, (6) converges to the cross-sectional covariances of the dependent variables in (5) (e.g., Andersen et al. (2003) and Jagannathan and Ma
(2003)). Since the regressors in the right-hand side of (5) are constant over the holding period,
our approach immediately yields a consistent and positive-definite estimate of the covariance
matrix of the error term ε, which we use to fit model (5) by GLS.
3.2.4

Empirical results

In Table 5 we report mean abnormal return estimates. For stocks underwritten by relationship
banks we compute the mean abnormal return as (β̂ 0 + β̂ Certify ), where β̂ 0 and β̂ Certify are the
GLS estimates of the coefficients in equation (5). For stocks managed by independent banks,
the mean abnormal return estimate is β̂ 0 . The difference between the two means is measured
by β̂ Certify . t-ratios in square brackets are computed using the GLS standard errors.
In panel A we report results for all IPOs from 1998 to 2000. We find some evidence that
IPOs taken public by their bank have overperformed the other stocks when the holding period
is one year (Panel A, FF row, column 3). A break-down by IPO year suggests that this result
is driven by the poor performance of stocks taken public by independent banks in 1999 (Panel
B, column 3). However, when we consider holding periods of two and three years we do not
find any difference in performance between the two groups of stocks regardless of the IPO year.

13
3.2.5

Robustness of the results

Among the members of a lending syndicate, the lead lender is likely to acquire the most information on the firm. Thus as a robustness check we replace Certify in equation (5) with
a binary variable that takes value one when the lead lender is a member of the IPO syndicate. The results, not reported here, are unchanged: during the first year since the IPO date
stocks underwritten by their bank overperformed other IPOs, but for longer holding periods
any difference in performance dissipates.
Prior studies have examined the linkage between the performance of an IPO and its characteristics. For instance, Puri (1999) argues that if banks have smaller claims in a firm, their
potential conflict of interest is lower and therefore they can fetch higher prices. Other studies
focused instead on the effect of venture backing on IPO performance. A venture capitalist
holding financial claims in a firm faces a conflict of interest. However, the same venture capitalist could reduce the asymmetric information problem and act as a certifier of the new
issue’s value. If venture-backed companies are better than nonventure-backed ones, investors
should incorporate these expectations in market prices. Empirical evidence supports this view:
venture-backed IPOs are valued higher than nonventure-backed stocks at the time of the IPO
(Megginson and Weiss (1991)); venture investment by lead underwriters significantly reduces
IPO underpricing (Li and Masulis (2003)); and venture-backed IPOs perform at least as well as
other stocks over the long run (Brav and Gompers (1997), Gompers and Lerner (1999)). Also
related, the reputation of the underwriting bank could have a positive effect on the future of
the firm and this effect may not be fully incorporated in market prices (Carter et al. (1998)).
Here we examine whether the findings of Section 3.2.4 are robust to controlling for these
effects. Specifically, we estimate the regression
µ
¶
1 + Ri,T
log
= β 0 + β Certify Certifyi + β X0 Xi + εi ,
1 + RPi ,T

(7)

where Xi includes variables in the following categories:
Bank exposure to the issuing firm: Firm’s leverage and ‘IPO purpose.’
Venture capital backing: A binary variable that identifies venture-backed IPOs.
Underwriter reputation: The underwriter’s market share during the IPO year.
‘IPO purpose’ is a categorical variable that equals one when the prospectus states that the
IPO is meant to refinance or repay bank debt. The underwriter’s market share during the IPO
year is a commonly used measure of underwriter reputation which correlates highly with other
proxies for reputations, e.g., the positioning of the underwriter’s name in the IPO’s tombstone
(Carter et al. (1998)).

14
The results are available from the authors upon request. The main finding is that β Certify
remains insignificant and its point estimate is similar to what we obtained for the univariate
regression (5). The coefficients on the other control variables are also insignificant. There
are, however, two exceptions. First, the coefficient on the ‘IPO purpose’ variable is negative
and significant at the five percent level when the holding period is one year. This evidence
suggests that investors may have underestimated the firm’s motive to pay back bank’s debt
with the IPO proceeds. However, at longer holding periods (two and three years) the same
coefficient is insignificant. Second, the coefficient on the ‘venture capital’ variable is negative
and significant at the five percent level when the holding period is one year. This is at odds
with the conclusions of the literature that has examined the performance of venture-backed
IPOs. Again, however, this result is not robust to the choice of the holding period: at the twoand three-year horizons the same coefficient is insignificant.

3.3

Calendar-time analysis of the portfolio returns

Although we attempt to eliminate the effect of cross-sectional correlation in buy-and-hold returns, there could be legitimate concerns that our approach to do so may still be inadequate.
As such, here we pursue a calendar-time approach (e.g., Fama (1998)).
As we did in the event-time study, for each IPO issued by the firm’s relationship bank we
identify a matching firm that is brought to the market by an independent bank. The matching
criteria are identical to those discussed in Section 3.2.1, except that now we consider matching
firms that went public within a certain window before or after (rather than prior to) the IPO
date of the stock taken public by a relationship bank. That is, we first look for a matching
firm’s IPO that has been issued within plus or minus seven days from the IPO date of the stock
managed by its bank. We progressively expand that interval to plus or minus three months
from the IPO date.
Once we have identified a sample of matching stocks, we compute both equal- and valueweighted returns on two portfolios, PS and PM . The first, PS , consists of a long position in the
stocks issued by relationship banks. The second, PM , comprises a simultaneous long position
in the corresponding matching stocks. We add a stock to both portfolios starting from the
first week when both the stock issued by the relationship bank and its match are first listed.
When a stock in the matching sample is delisted, we splice its returns with the returns on the
substitute matching stock. We hold each pair of stocks in the portfolios PS and PM for a period
that ranges from one to three years.
We consider a zero-cost investment strategy that entails a long position in portfolio PS and a
short position in portfolio PM . We test the performance of PS , PM , and the long-short strategy
PS − PM using the Fama and French (1993) linear three-factor model, augmented with a fourth

15
‘momentum’ factor as in Carhart (1997):
rP,t = α + β M (rM, t − rF, t ) + β HM L HM Lt + β SM B SM Bt + β U M D U M Dt + εt ,

(8)

where rM, t − rF, t is the week-t excess return on the market portfolio; SM Bt is the difference
between the return on a portfolio of small stocks and the return on a portfolio of large stocks
in week t; HM Lt is the difference between the return on a portfolio of high book-to-market
stocks and the return on a portfolio of low book-to-market stocks in week t; and U M Dt is the
week-t return on a momentum portfolio that is long stocks that have performed well in the past
and short stocks that have performed poorly in the past. The data on the SM Bt , HM Lt , and
U M Dt factors are from Ken French’s data library.
If certification prevails, then we have
H0 : α = 0
We test this null hypothesis against the alternative that α 6= 0.
3.3.1

Empirical findings

We report estimation results for the regression (8) in Table 6. In Columns 1-3 the dependent
variable rP,t is the weekly excess return on the sample portfolio, PS : rPS ,t − rF,t . In Columns
4-6, it is the weekly excess return on the matching portfolio, PM : rPM ,t − rF,t . In Columns
7-9, the dependent variable is the weekly excess return on the portfolio that is long in the
sample portfolio and short in the matching portfolio, PS − PM : rPS , t − rPM , t . In Panels A and
C portfolio returns are equally weighted, while in Panels B and D they are value weighted. In
Panels A and B the matching criteria are the IPO date and the book-to-market ratio, while
in Panels C and D they are the IPO date and the market value of equity. Columns 1Y, 2Y,
and 3Y report estimation results corresponding to holding periods of one, two, and three years
for the stocks in the portfolios. In all regressions we use yearly decimal scaling for the return
series. As such, an α estimate of, say, 0.01, indicates that a portfolio has had an abnormal
return of 1% per year.
For regressions that have returns on the portfolios PS and PM as a dependent variable we find
that all factors are priced. As expected, the coefficients on the market, SM B, HM L, and U M D
factors are all significant and the explanatory power of the regressions is high. But for the longshort portfolio PS − PM most factor loadings are insignificant (Columns 7-9). In particular, this
finding applies to the U M D factor. That is, although we have not explicitly used momentum
as a matching criterion, the portfolio of matching stocks has a loading on the momentum factor
that is very close to that of the portfolio of stocks underwritten by relationship banks. In some
cases, the HM L factor remains significant. This occurs especially when the holding horizon of

16
the stocks in the portfolio is longer (two and three years). Not surprisingly, the HM L factor is
significant when the matching criteria are the IPO date and the market value of equity (Panels
C and D). Further, the adjusted R2 coefficient drops significantly when the dependent variable
is the return on the long-short portfolio. In particular it is in most cases close to zero when
the matching criteria are the IPO date and the book-to-market ratio. Overall, these results
show that we have eliminated most sources of systematic risk from the long-short portfolios,
especially when the matching criteria are the IPO date and the book-to-market ratio.
We then proceed to examine the performance of the three portfolios. In almost all regressions, the α coefficients are insignificant. This finding applies not only to the long-short
PS − PM strategy, but also to the individual portfolios PS and PM . Further, in most cases the α
estimates are also economically small. For instance, the long-short portfolio has an insignificant
abnormal return of 1% per year when the holding periods are two or three years, the matching
criteria are the IPO date and the book-to-market ratio, and returns are value weighted (Table
6, Panel B, columns 8 and 9). When returns are equally weighted, the abnormal return is
approximately 10% per year and insignificant (Panel A, columns 8 and 9). This difference in
point estimates is likely driven by the relatively higher weight that smaller stocks are given
when all stocks are given the same weight in the portfolio.
One exception to these findings concerns the α coefficient on the PS portfolio when the
holding period is one year and the matching criteria are the IPO date and the book-to-market
ratio. When returns are equally weighted, we find α = 0.33, significant at the 5% level (Table
6, Panel A, column 1). This results suggests that stocks underwritten by relationship banks
had a 33% abnormal return per year when the holding period in the portfolio for these IPOs
is one year. Related, we find α = 0.35, significant at the 5% level, for the returns on the
long-short portfolio PS − PM (Panel A, column 7), i.e., based on this metric IPOs underwritten
by relationship banks outperformed stocks taken public by independent banks. These findings,
however, are not robust. For instance, when returns are value-weighted, the α coefficient on
the PS portfolio is insignificant (Panel B, column 1). Similarly, when the matching criteria are
the IPO date and the market value of equity, the α estimates are insignificant for all portfolios
and holding periods (Panels C and D).
Overall, this evidence suggests that the IPOs in our sample are priced accurately and, in
particular, that there is no difference in performance between the IPOs taken public by either
relationship or outside banks. There is some evidence that the pricing of IPOs did not fully
incorporate the certification premium generated by relationship banks, but this finding is not
robust to the choice of the holding period and the matching criteria.

17

3.4

Firm-underwriter selection and market valuation

We examine the selection of firms that go public with their relationship bank with a selection
model similar to the one used by Puri (1996) and reviewed by Li and Prabhala (2005).3 The
selection variable Wi is a function of explanatory variables Zi ,
Certifyi = 1 iff

W i = Zi γ + η i > 0

Certifyi = 0 iff

W i = Zi γ + η i ≤ 0 ,

(9)

where Zi denotes publicly available information that affects the firm i’s decision to go public
with its relationship bank, γ is a vector of probit coefficients, and η i is orthogonal to the publicly
observable variables Zi . Intuitively, the firm goes public with its bank if the benefits of doing so
exceed its cost as represented by the condition Wi = Zi γ + η i > 0. The firm valuation equation
is:
Valuei = Xi β + ²i ,

(10)

where Xi denotes observable characteristics that determine firm value, β is a vector of coefficients to be estimated, and ²i is orthogonal to the publicly observable variables Xi . Similar to Purnanandam
and Swaminathan
(2004), we normalize market value by firm size, i.e.,
³
´
Market Value of Equity
Valuei = log Revenues at IPO year .
i

If, as we conjecture, firms of certain value select to go public with their pre-IPO banks
and these banks choose to manage their IPO (i.e., the firm-bank match is not random), then
²i in equation (10) and η i in equation (9) are correlated. In particular, as is standard in
this literature we assume that ²i and η i have a mean-zero bivariate normal distribution with
var(η) = 1, var(²) = σ 2ε , and cov(η, ²) = σ η,ε .
For the firms that select to go public with their pre-IPO relationship bank we have
Valuei |(Certifyi = 1) = Xi β + (²i |Zi γ + η i > 0)
= Xi β + π (η i |Zi γ + η i > 0 ) + υ i ,

(11)

where ²i |η i = πη i + υ i and υ i is an orthogonal mean-zero error term. Taking expectations of
equation (11) we obtain
E (Valuei |Certifyi = 1) = Xi β + πE (η i |Zi γ + η i > 0) .

(12)

Similarly, for the firms that go public with an outside bank we have
E (Valuei |Certifyi = 0) = Xi β + πE (η i |Zi γ + η i ≤ 0) .
3

(13)

Schenone (2004) examines the firm’s choice of a pre-IPO lender during the 1998-2000 period. She uses a

Heckman two-step procedure to study whether there is selection among the firms that establish a relationship
with a bank that can later underwrite their IPO, and finds no evidence that these firms acted strategically when
establishing a pre-IPO banking relationship with a prospective underwriter. However, she does not examine the
selection of firms that go public with their bank.

18
We have assumed that ²i and η i are bivariate normal, thus E (η i |Zi γ + η i > 0 ) =
E (η i |Zi γ + η i ≤ 0) =

φ(Zi γ)
− 1−Φ(Z
.
i γ)

φ(Zi γ)
Φ(Zi γ)

and

Equation (10) therefore becomes:

φ(Zi γ)
φ(Zi γ)
Valuei = Xi β + πCertifyi
− π(1 − Certifyi )
+ νi
Φ(Zi γ)
1 − Φ(Zi γ)
½
¾
φ(Zi γ)
φ(Zi γ)
= Xi β + π Certifyi
− (1 − Certifyi )
+ νi .
Φ(Zi γ)
1 − Φ(Zi γ)

(14)

Note that π = ρη² σ ² , where ρη² is the correlation coefficient between ² and η and σ ² is the
standard deviation of ². Intuitively, the last term in equation (14) can be interpreted as the
market’s updated information regarding the value of the firm once the market observes the firm’s
choice of bank. That is, when investors observe a firm selecting in either the Certifyi = 1 or
the Certifyi = 0 categories, they update their priors about the firm’s value, and this updated
information is incorporated in the valuation equation. The test for self-selection hinges on the
estimate and significance of π. If π = 0, then firms are randomly selecting whether to go public
with their pre-IPO relationship bank, if π > 0 then firms that are likely to go public with their
relationship bank have a higher valuation, and if π < 0 then firms that are likely to go public
with their relationship bank have a lower valuation.
We estimate equation (14) using a Heckman (1979) two-step procedure. In the first step,
we fit a probit model by³ maximum
´ likelihood
³ 0 to´ obtain an estimate γ̂ in equation (9). We
φ(γ̂ 0 Zi )
φ(γ̂ Zi )
then use γ̂ to calculate 1−Φ(γ̂ 0 Zi ) and Φ(γ̂
in equation (14) and we fit the regression
0
Zi )
by ordinary least squares (OLS). In the second-step regression, the standard errors for the β
coefficient must be corrected for the fact that (1) we fix γ at the first-step estimate γ̂ and (2)
the error term ν i may be heteroskedastic. We compute corrected standard errors by using the
bootstrapping method (we estimate γ̂ and β̂ for 1,000 resamples with replacement, each of the
size of the original data set, and compute bootstrapped standard errors as in Greene (2003),
page 924).
In the first estimation step we need instruments that explain whether the firm goes public
with the relationship bank but are uncorrelated with the firm’s post-IPO market value. We
find that (1) the number of banks in the lending syndicate and (2) the percentage of the loan
contributed by the lead lender correlate highly with Certify but not with the firm’s market
value. Since the correlation between these two instruments is also high, we only include one of
the two, the number of banks in the lending syndicate.
The results in Table 7 show that the firm-bank selection is not random. Specifically, the
π coefficient in equation (14) is significant at the 5 or 10 percent levels depending on the
characteristics included in the variable X. Further, the point estimate π̂ is positive and stable
across different specifications, ranging from 0.22 to 0.29. These findings indicate that firms

19
that go public with their relationship bank are valued higher than firms that did not go public
with their bank.
The estimates for the other coefficients on the characteristics included in the Xi variable are
also significant and their sign is consistent with a priori intuition. For instance, larger firms are
valued higher, but at a decreasing rate (the coefficient on Log(Assets) is positive and significant
and the coefficient on the squared value of Log(Assets) is negative and significant). Firms with
higher cashflows to assets are valued higher. Further, firms in which the ratio of shares sold by
existing shareholders to the total number of shares issued (an indicator for the firm’s managers
desire to cash out their investment) are valued lower.
Overall, these findings support the certification hypothesis: in an attempt to shy away from
potential conflicts of interest, relationship banks carefully select to take public their higher
value clients. This conclusion is consistent with the evidence in Puri (1996), who estimates a
similar selection model and finds that bond underwriting by commercial banks conveys positive
information about the issuer that improves the prices at which the debt offering can be sold.

4

Discussion and Conclusions

When a bank lends funds to a firm, it acquires privileged information on its client. What
use the bank will make of such information is controversial. If the firm decides to issue new
securities, the bank is in a position to convey its privileged information to less knowledgeable
market participants and to act as a certifier of the new issue’s true value. But, because of
adverse selection problems the bank might fall prey to conflicts of interest and help its client
to issue junior claims for more than their worth.
Prior to 1998 there was little involvement by commercial banks in the market of equity
issues. As such, much of the debate on conflict of interest and certification in the market for
IPOs focused on IPOs underwritten by investment banks that hold a venture capital position
in the issuing firm. For instance, Gompers and Lerner (1999) find that IPOs underwritten by
investment banks that hold a venture capital position in the issuing firm are sold at a greater
discount than similar IPOs managed by independent banks, yet over the long run these stocks
perform no worse, and may actually perform better, than offerings in which no underwriter has
a venture stake. Li and Masulis (2003) show that venture investment in the issuing firm by the
lead underwriter can significantly reduce IPO underpricing.4
In this paper we contribute to the debate by presenting evidence based on a new sample,
IPOs managed by commercial banks. We focus on two sets of test. First, we investigate the
4

Also related, other studies have found that venture capital backing has a positive effect on an IPO’s

performance (e.g., Aggarwal and Klapper (2003), Brav and Gompers (1997), and Megginson and Weiss (1991).

20
long-run performance of the IPOs underwritten by the firm’s bank. As such, we add to Schenone
(2004) who examines IPOs managed by relationship banks but focuses on their first-tradingday performance. Using a cross-sectional model, we find that IPOs managed by inside banks
experience buy-and-hold benchmark-adjusted returns that are similar to those observed for a
matching sample of stocks managed by outside banks. Further, we examine the calendar-time
returns on a portfolio that is long the stocks underwritten by relationship banks and short
ex-ante similar stocks taken public by independent institutions. We test the performance of
this trading strategy using a linear four-factor model. Again, we conclude that the IPOs taken
public by their bank perform at least as well as ex-ante similar stocks managed by independent
institutions.
Second, we argue that the concern for conflicts of interest can generate self-selection among
the firms that go public with their bank. We use a two-step procedure to estimate a Heckman
(1979) type model similar to that of Puri (1996). We find that the outcome of going public with a
relationship bank is not random. High-value firms that could go public with their bank typically
do so, while lower-value firms go public with an independent underwriter. This evidence adds
to Schenone (2004), who studies IPO valuation but does not examine the selection of firms
that go public with their bank, and to Yasuda (2005), who examines a sample of debt issues
and shows that bank relationships have positive and significant effects on a firm’s underwriter
choice.
The recent literature has examined multiple aspects of universal banking.5 For instance,
Gande, Puri, and Saunders (1999) and Yasuda (2005) investigate the competitive effect of commercial banks entry in the market of debt issues and find evidence consistent with the market
becoming more competitive. However, Kanatas and Qi (2003) warn that an integrated financial services market can be less innovative than one with specialized intermediaries. Further,
Drucker and Puri (2005) show that investment banks engage in a substantial amount of tying
and that this practice allows firms to reduce their financing costs when issuing debt.
We add to this literature by presenting evidence that supports the certification role of relationship banks underwriting their clients’ IPOs. This is consistent with the predictions of
Puri’s (1999) model and with the findings of the literature that has examined the certification role of commercial banks that underwrite debt issues (e.g., Kroszner and Rajan (1994),
Gande et al. (1997), and Puri (1994, 1996)). Further, our results complement the evidence
in Schenone (2004), who shows that pre-IPO banking relationships reduce the asymmetric
information problems faced by first-time issuers.
Our results can be interpreted as follows. Relationship banks avoid potential conflicts
of interest by choosing to underwrite their best clients’ IPOs. Rational investors anticipate
5

Drucker and Puri (2006) provide an extensive survey of this literature.

21
the bank’s reaction and value issues underwritten by the pre-IPO lender higher than IPOs
managed by independent banks. The market is not fooled. Over the long run, IPOs managed
by relationship banks do not underperform similar issues managed by outside banks. In sum,
our findings indicate that in this respect the effect of the 1999 repeal of Sections 20 and 32 of
the Glass-Steagall Act has not been negative.

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25
Table 1: Summary Statistics for Firm Characteristics at the Time of the IPO. The data are
hand-collected from the financial statements reported in the last amended prospectus filed with
the SEC, for the last complete calendar year prior to the firm’s IPO. All values are expressed
in thousands of U.S. dollars. Certify equals one if the firm went public with its relationship
bank, and zero otherwise. Standard deviations are reported in parentheses.
Firm Characteristics

All IPOs

Certify = 1

Certify = 0

356,701
(1,598,672)

1,033,532
(2,784,841)

61,183
(150,607)

Total Debt

125,700
(449,995)

366,416
(763,709)

21,238
(54,902)

Short term debt

9,229
(38,199)

21,486
(66,196)

4,069
(12,386)

362,774
(2,380,223)

1,035,020
(4,247,221)

69,259
(194,381)

Gross Profits

87,433
(411,545)

249,652
(735,018)

20,097
(41,457)

Operating Cash flow

28,024
(244,262)

89,382
(440,098)

1,853
(29,085)

Working Capital

43,187
(235,659)

127,270
(417,890)

7,322
(31,666)

Cash

21,231
(98,193)

55,051
(173,551)

6,485
(9,706)

Shareholders Equity

84,345
(646,382)

260,813
(1,158,361)

8,124
(61,728)

IPO Proceeds

154,942
(417,378)

356,018
(708,500)

67,683
(91,602)

(years between inception and IPO date)

7.72
(11.08)

8.79
(13.36)

7.26
(9.92)

Fraction of the Firm Sold
by Shareholders (percent)

27.55
(30.87)

34.74
(53.17)

24.53
(12.03)

Underpricing (percent)

45.13
(77.08)

25.34
(42.18)

53.77
(86.77)

No. Observations

306

93

213

Percent of Sample

100.0

30.4

69.6

Total Assets

Revenues

Firm Age

26
Table 2: Wealth Relatives. For each IPO underwritten by the firm’s pre-IPO relationship bank,
we identify a matching firm that is brought to the market by an independent bank. When a
stock in the matching sample is delisted, we splice its returns with the returns on a substitute
matching stock. We compute the average buy-and-hold return across the stocks underwritten
by relationship banks, RT,S , and the average return on stocks in the matching sample, RT,M .
The wealth relative is the ratio (1 + RT,S )/(1 + RT,M ). In columns 1-6, the matching criteria are
the IPO date and the book-to-market value of equity. In columns 7-12, they are the IPO date
and the market value of equity on the fourteenth trading day. The holding period T ranges
from one to three years.
IPO Date and BE/ME matching criteria

IPO Date and ME matching criteria

Equal-weighted return Value-weighted return Equal-weighted return Value-weighted return
1Y

2Y

3Y

1Y

2Y

3Y

1Y

2Y

3Y

1Y

2Y

3Y

1.24

0.82

0.76

1.11

1.39

1.04

1.15

1.18

1.54

1.03

1.37

2.02

27

Table 3: Mean Buy-and-Hold Abnormal Returns. The abnormal return on IPO i is
BHARi =

Ri,T
T

−

RPi ,T
T

,

where Ri,T and RPi ,T are buy-and-hold returns on stock i (exclusive of the first trading day
return) and the benchmark portfolio Pi , respectively. The holding period T ranges from one to
three years. Where available, we include the firm’s delisting return. The benchmarks are the
return on 100 portfolios of stocks ranked by size and book-to-market (FF); the return on the
CRSP value-weighted index inclusive of distributions (VW); the S&P 500 cum-dividend return
(S&P 500); the Nasdaq cum-dividend return (Nasdaq); and the return on 49 industry-ranked
portfolios (Ind.). In column (S) we report mean (equal- and value-weighted) buy-and-hold
abnormal returns for the sample of IPOs underwritten by the firm’s pre-IPO relationship bank.
For each IPO underwritten by the firm’s pre-IPO relationship bank, we identify a matching
firm that is brought to the market by an independent bank. The matching criteria are the
IPO date and the book-to-market value of equity. When a stock in the matching sample is
delisted, we splice its returns with the returns on a substitute matching stock. In column
(M) we report (equal- and value-weighted) buy-and-hold abnormal returns for the IPOs in the
matching sample. The difference between mean buy-and-hold abnormal returns for IPOs in
the sample and in the matching group is in column (S-M). In Panels E-H we report results for
1998, 1999, and 2000 IPO years. Skewness-robust t-ratios are in square brackets. Significance
levels are determined based on bootstrapped critical values.
significance at the 1%, 5%, and 10% level, respectively.

∗∗∗

,

∗∗

, and

∗

indicate statistical

28
T = 1Y
S

M

T = 2Y
S-M

S

M

T = 3Y
S-M

S

M

S-M

Table 3, Panel A: equal-weighted mean abnormal returns
FF

0.12
[ 0.81]

-0.06
[-0.37]

0.18
[ 1.05]

-0.04
[-0.39]

0.09
[ 0.64]

-0.12
[-0.75]

0.00
[ 0.19]

0.10
[ 1.30]

-0.09
[-0.97]

VW

0.06
[ 0.43]

-0.16
[-0.85]

0.22
[ 1.22]

-0.05
[-0.49]

0.06
[ 0.45]

-0.10
[-0.64]

-0.05
[-0.79]

0.03
[ 0.41]

-0.08
[-0.87]

S&P 500

0.05
[ 0.35]

-0.17
[-0.91]

0.22
[ 1.22]

-0.04
[-0.48]

0.06
[ 0.46]

-0.10
[-0.64]

-0.05
[-0.81]

0.03
[ 0.40]

-0.08
[-0.87]

Nasdaq

-0.01
[ 0.07]

-0.22
[-1.22]

0.22
[ 1.22]

-0.12
[-1.25]

-0.02
[ 0.05]

-0.10
[-0.64]

-0.01
[-0.12]

0.07
[ 0.97]

-0.08
[-0.87]

Ind.

0.15
[ 1.08]

-0.13
[-0.81]

0.29
[ 1.74]

0.03
[ 0.45]

0.09
[ 0.66]

-0.06
[-0.41]

-0.00
[ 0.02]

0.04
[ 0.64]

-0.05
[-0.53]

Table 3, Panel B: value-weighted mean abnormal returns
FF

-0.30
[-2.40]∗∗∗

-0.17
[-0.49]

-0.12
[-0.47]

-0.10
[-1.49]

-0.10
[-1.13]

0.00
[-0.00]

-0.06
[-1.40]

-0.01
[-0.06]

-0.04
[-0.61]

VW

-0.24
[-2.47]∗∗∗

-0.25
[-0.59]

0.00
[-0.10]

-0.11
[-1.41]

-0.16
[-1.75]

0.06
[ 0.48]

-0.08
[-1.83]∗

-0.07
[-0.68]

-0.01
[-0.18]

S&P 500

-0.24
[-2.49]∗∗∗

-0.26
[-0.61]

0.02
[-0.05]

-0.11
[-1.41]

-0.17
[-1.77]

0.06
[ 0.50]

-0.08
[-1.79]

-0.07
[-0.67]

-0.01
[-0.18]

Nasdaq

-0.32
[-2.51]∗∗∗

-0.16
[-0.41]

-0.16
[-0.59]

-0.06
[-0.99]

-0.09
[-1.16]

0.03
[ 0.28]

-0.01
[-0.22]

0.01
[ 0.20]

-0.02
[-0.29]

Ind.

-0.10
[-1.22]

-0.21
[-0.56]

0.10
[ 0.25]

-0.04
[-0.56]

-0.12
[-1.45]

0.08
[ 0.87]

-0.01
[-0.40]

-0.03
[-0.31]

0.02
[ 0.13]

Table 3, Panel C: equal-weighted mean abnormal returns, FF benchmark
1998

-0.05
[-0.24]

0.11
[ 0.82]

-0.16
[-0.83]

-0.13
[-0.50]

0.29
[ 0.81]

-0.42
[-0.99]

0.02
[ 0.29]

0.30
[ 1.61]∗

-0.28
[-1.17]

1999

0.33
[ 0.72]

-0.37
[-0.78]

0.69
[ 2.05]∗∗

-0.07
[-0.72]

-0.06
[-0.24]

-0.01
[-0.09]

-0.05
[-0.88]

-0.04
[-0.46]

-0.01
[-0.07]

2000

0.17
[ 1.61]∗

-0.19
[-1.43]

0.36
[ 1.89]

0.13
[ 1.84]∗

-0.07
[-0.88]

0.19
[ 1.85]

0.05
[ 1.23]

-0.04
[-0.86]

0.09
[ 1.52]

Table 3, Panel D: value-weighted mean abnormal returns, FF benchmark
1998

0.13
[ 0.84]

0.14
[ 0.60]

-0.01
[-0.06]

0.13
[ 0.65]

0.34
[ 0.95]

-0.21
[-0.46]

0.09
[ 0.98]

0.60
[ 1.39]

-0.51
[-1.10]

1999

-0.56
[-2.82]∗∗∗

-0.61
[-1.93]∗∗

0.05
[ 0.18]

-0.20
[-2.57]∗∗∗

-0.27
[-1.95]∗∗

0.07
[ 0.58]

-0.11
[-2.06]∗∗

-0.14
[-1.87]∗∗

0.03
[ 0.40]

2000

0.04
[ 0.35]

-0.37
[-3.68]∗∗∗

0.41
[ 2.24]∗∗

-0.00
[-0.06]

-0.14
[-3.51]∗∗∗

0.14
[ 1.12]

-0.01
[-0.24]

-0.09
[-2.26]∗∗

0.08
[ 1.06]

29
Table 4: Skewness and Kurtosis of the Buy-and-Hold Benchmark-Adjusted Returns. We report
sample skewness and kurtosis for the buy-and-hold benchmark-adjusted returns. Here, the
benchmark is the return on 100 portfolios of stocks ranked by size and book-to-market deciles.
The holding periods are T = 1, 2, and 3 years.
Skewness
Ri,T
T

T

T = 1Y

1Y
2Y
3Y

T = 2Y

³
log

4.09
7.82
7.34

1+Ri,T
1+RPi ,T

´

Ri,T
T

-0.71
-0.45
-0.44

40

150

30

100

20

50

10
0

5

10

15

0

200

40

150

30

100

20

50

10

0

0

5

10

15

0

200

40

150

30

100

20

50

10

0

0

5
10
Ri,T/T − RP ,T/T
i

15

−

RPi ,T
T

³
log

30.98
88.87
81.82

200

0

T = 3Y

−

RPi ,T
T

Kurtosis

0

1+Ri,T
1+RPi ,T

´

3.62
2.94
2.51

−6

−4

−2

0

2

−6

−4

−2

0

2

−6

−4
−2
0
2
log( ( 1+Ri,T ) / ( 1+RP ,T ) )
i

Figure 1: The Sample Distribution of the Buy-and-Hold Benchmark-Adjusted Returns. Buyand-hold returns are computed by compounding daily returns from the day of the IPO (exclusive
of the first trading day return) to the end of the holding period T , which ranges from one to
three years. Where available, we include the firm’s delisting return. In the left panels, the
buy-and-hold abnormal return on IPO i is BHARi =

Ri,T
T

−

RPi ,T
T

, where RPi ,T is the buy-and-

hold benchmark portfolio return. Here, the benchmark is the return on 100 portfolios of stocks
ranked by size and book-to-market
³
´ deciles. In the right panels, the buy-and-hold abnormal
1+Ri,T
return is BHARi = log 1+RP ,T .
i

30
Table 5: Mean Buy-and-Hold Abnormal Returns: Nonzero Cross-Sectional Correlation. The
abnormal return on IPO i is
µ
BHARi = log

1 + Ri,T
1 + RPi ,T

¶
,

where Ri,T and RPi ,T are buy-and-hold returns on stock i (exclusive of the first trading day
return) and the benchmark portfolio Pi , respectively. The holding period T ranges from one to
three years. Where available, we include the firm’s delisting return. The benchmarks are the
return on 100 portfolios of stocks ranked by size and book-to-market (FF); the return on the
CRSP value-weighted index inclusive of distributions (VW); the S&P 500 cum-dividend return
(S&P 500); the Nasdaq cum-dividend return (Nasdaq); and the return on 49 industry-ranked
portfolios (Ind.). To deal with the heteroskedasticity and the cross-sectional dependence of
returns that overlap in calendar time, we fit the following regression by GLS:
¶
µ
1 + Ri,T
log
= β 0 + β Certify Certifyi + εi .
1 + RPi ,T
The variance-covariance matrix of the error term is consistently estimated using high-frequency,
daily returns. If the returns on stocks i and j overlap for less than three months, we fix their
covariance at zero. The mean abnormal return for IPOs underwritten by the firm’s bank
is estimated by β̂ 0 + β̂ Certify (columns 1, 4, and 7). The mean abnormal return for IPOs
underwritten by outside banks is estimated by β̂ 0 (columns 2, 5, and 8). The difference between
the two means is estimated by β̂ Certify (columns 3, 6, and 9). In square brackets are t-ratios.
∗∗∗ ∗∗

,

, and

∗

indicate statistical significance at the 1%, 5%, and 10% level, respectively.

31

T = 1Y
β̂ 0 + β̂ Cert.

β̂ 0

T = 2Y
β̂ Cert.

β̂ 0 + β̂ Cert.

β̂ 0

T = 3Y
β̂ Cert.

β̂ 0 + β̂ Cert.

β̂ 0

β̂ Cert.

Table 5, Panel A: Mean abnormal returns for all IPOs from 1998 to 2000.
FF

0.03
[ 0.32]

-0.15
[-2.06]∗∗

0.18
[ 1.98]∗∗

-0.05
[-0.48]

-0.16
[-1.56]

0.11
[ 0.89]

-0.02
[-0.20]

-0.13
[-1.12]

0.10
[ 0.74]

VW

-0.04
[-0.44]

-0.05
[-0.51]

0.01
[ 0.09]

0.06
[ 0.51]

0.08
[ 0.61]

-0.02
[-0.17]

0.08
[ 0.69]

0.25
[ 1.83]∗

-0.17
[-1.15]

S&P 500

0.07
[ 0.68]

0.01
[ 0.06]

0.06
[ 0.64]

0.08
[ 0.64]

0.09
[ 0.58]

-0.00
[-0.03]

0.12
[ 0.94]

0.28
[ 1.87]∗

-0.16
[-1.05]

Nasdaq

-0.34
[-2.90]∗∗∗

0.05
[ 0.44]

-0.39
[-4.69]∗∗∗

0.17
[ 1.21]

0.16
[ 1.07]

0.01
[ 0.09]

0.12
[ 0.84]

0.25
[ 1.70]∗

-0.13
[-0.91]

Ind.

0.02
[ 0.20]

-0.09
[-1.11]

0.11
[ 1.15]

-0.01
[-0.14]

0.05
[ 0.44]

-0.07
[-0.50]

0.07
[ 0.67]

0.20
[ 1.57]

-0.12
[-0.87]

Table 5, Panel B: Mean abnormal returns by IPO year, FF benchmark
1998

0.15
[ 1.43]

0.01
[ 0.08]

0.14
[ 1.13]

-0.04
[-0.20]

-0.13
[-0.97]

0.10
[ 0.50]

0.04
[ 0.19]

-0.09
[-0.60]

0.13
[ 0.57]

1999

-0.13
[-0.81]

-0.43
[-3.27]∗∗∗

0.30
[ 1.70]∗

-0.18
[-0.87]

-0.33
[-1.88]∗

0.15
[ 0.68]

-0.16
[-0.70]

-0.28
[-1.51]

0.12
[ 0.48]

2000

0.11
[ 0.89]

-0.16
[-0.88]

0.27
[ 1.40]

-0.03
[-0.18]

-0.20
[-0.76]

0.17
[ 0.57]

-0.10
[-0.48]

-0.18
[-0.62]

0.08
[ 0.25]

32
Table 6: Long-Run Portfolio Returns: A Calendar-Time Analysis. For each IPO underwritten
by the firm’s pre-IPO relationship bank, we identify a matching firm that is brought to the
market by an independent bank. In Panels A and B the matching criteria are the IPO date
and the book-to-market value of equity, while in Panels C and D they are the IPO date and
the market value of equity. The sample portfolio consists of stocks underwritten by the firm’s
relationship bank. The matching stocks managed by independent institutions are included in
the matching portfolio. We add a pair of stocks to the sample and matching portfolios starting
from the first week when both the stock issued by the relationship bank and its match are
first listed. When a stock in the matching sample is delisted, we splice its returns with the
returns on a substitute matching stock. Where available, we include the firm’s delisting return.
The stock in the sample portfolio and its corresponding match in the matching portfolio are
held for a period that ranges from one to three years. In all panels, the dependent variable in
Columns 1-3 and 4-6 is the weekly return on the sample and matching portfolios, respectively.
The dependent variable in Columns 7-9 is the return on a portfolio that is long the sample
stocks and is short the matching stocks. In Panels A and C portfolio returns are equally
weighted, while in Panels B and D they are value weighted. The independent variables are
M KTt = rM,t − rF,t , the weekly excess return on the market portfolio; SM Bt , the difference
between the return on a portfolio of small stocks and the return on a portfolio of large stocks;
HM Lt , the difference between the return on a portfolio of high book-to-market stocks and the
return on a portfolio of low book-to-market stocks; and U M Dt , the return on a ‘momentum’
portfolio. Returns are measured in yearly decimal units. Standard errors are in parentheses.
∗∗∗ ∗∗

,

, and

∗

indicate statistical significance at the 1%, 5%, and 10% level, respectively.

33

rSample,t − rF,t

1Y

2Y

rM atch,t − rF,t

3Y

1Y

2Y

rSample,t − rM atch,t

3Y

1Y

2Y

3Y

Table 6, Panel A: IPO Date and BE/ME matching criteria; equal-weighted portfolio returns
α
M KTt
SM Bt
HM Lt
U M Dt
2
RAdj.

0.33∗∗
[ 2.37]
1.18∗∗∗
[ 7.21]
1.11

∗∗∗

[ 5.00]
-0.52∗∗
[-2.20]
-0.55

∗∗∗

0.35∗∗

0.10

0.02

-0.02

-0.01

0.11

[ 0.88]

[ 0.24]

[-0.11]

[-0.04]

[ 0.96]

1.01∗∗∗
[ 8.06]
∗∗∗

1.10∗∗∗
[ 9.93]
∗∗∗

1.15

1.20

[ 8.94]

[ 9.50]

-0.33∗∗
[-2.45]
∗∗∗

0.94∗∗∗
[ 5.13]
1.28

∗∗∗

[ 7.73]
-0.77∗∗∗

-0.04
[-0.28]
∗∗∗

-0.61

-0.59

[-4.63]

[-6.63]

[-7.82]

68.92%

65.29%

62.73%

[-2.72]
-0.45

∗∗∗

0.83∗∗∗
[ 4.95]
∗∗∗

1.18

[ 7.83]
-0.77∗∗∗
[-3.91]
∗∗∗

0.10

-0.09

[ 2.03]

[ 0.84]

[-0.90]

0.24

0.18

0.09

[ 1.31]

[ 1.17]

[ 0.73]

-0.17

-0.04

-0.14

[ 11.65]

[-0.82]

[-0.21]

[-0.87]

-0.31∗∗

0.25

1.01∗∗∗
[ 11.27]
∗∗∗

1.34

[-2.41]
∗∗∗

0.43∗∗

0.27

[ 0.83]

[ 2.07]

[ 1.52]

-0.53

-0.54

-0.10

-0.08

-0.05

[-4.14]

[-4.76]

[-6.08]

[-0.96]

[-0.91]

[-0.59]

62.42%

61.69%

69.20%

0.72%

1.53%

0.87%

Table 6, Panel B: IPO Date and BE/ME matching criteria; value-weighted portfolio returns
α
M KTt
SM Bt
HM Lt
U M Dt
2
RAdj.

0.22

0.00

0.01

-0.16

-0.01

-0.00

0.39∗

0.01

0.01

[ 1.27]

[ 0.01]

[ 0.06]

[-0.67]

[-0.05]

[-0.02]

[ 1.66]

[ 0.06]

[ 0.07]

0.24

0.15

-0.17

[ 0.89]

[ 0.79]

[-0.97]

1.24∗∗∗
[ 5.59]
1.14∗∗∗
[ 3.76]
-0.61∗∗
[-2.15]
-0.58∗∗∗

0.92∗∗∗
[ 5.55]
1.09∗∗∗
[ 6.00]
-0.47∗∗∗
[-2.63]
-0.67∗∗∗

1.02∗∗∗
[ 6.13]
1.11∗∗∗
[ 7.39]
-0.31
[-1.40]
-0.68∗∗∗

1.00∗∗∗
[ 3.44]
1.31∗∗∗
[ 4.19]
-1.13∗∗∗
[-2.58]
-0.44∗∗

0.77∗∗∗
[ 3.56]
1.32∗∗∗
[ 5.52]
-1.42∗∗∗
[-5.44]
-0.65∗∗∗

1.19∗∗∗
[ 7.32]
1.37∗∗∗
[ 6.31]
-0.92∗∗∗
[-4.91]
-0.78∗∗∗

[-3.54]

[-5.26]

[-5.66]

[-2.02]

[-4.00]

[-6.18]

63.68%

52.98%

62.95%

52.11%

56.85%

63.29%

-0.17

-0.22

-0.27

[-0.49]

[-0.76]

[-1.10]

0.53

0.95∗∗∗

0.61∗∗∗

[ 1.26]

[ 3.66]

[ 3.12]

-0.15

-0.01

0.10

[-0.85]

[-0.08]

[ 0.64]

1.40%

8.07%

8.29%

34

rSample,t − rF,t

1Y

2Y

rM atch,t − rF,t

3Y

1Y

2Y

rSample,t − rM atch,t

3Y

1Y

2Y

3Y

Table 6, Panel C: IPO Date and ME matching criteria; equal-weighted portfolio returns
α
M KTt
SM Bt
HM Lt
U M Dt
2
RAdj.

0.19∗

0.07

0.04

0.29∗

0.21

[ 1.84]

[ 0.72]

[ 0.55]

[ 1.73]

[ 1.56]

1.30∗∗∗
[ 12.10]
1.20

∗∗∗

1.20∗∗∗
[ 12.14]
∗∗∗

1.14∗∗∗
[ 11.20]
∗∗∗

1.14

1.14

[ 7.08]

[ 8.57]

[ 9.52]

-0.05

-0.03

0.04

[-0.34]
-0.46

∗∗∗

[-0.23]
∗∗∗

1.28∗∗∗
[ 7.33]
1.26

∗∗∗

[ 6.82]
-1.05∗∗∗

[ 0.35]
∗∗∗

-0.56

-0.57

[-4.60]

[-7.09]

[-7.57]

72.26%

72.70%

68.27%

[-4.37]
-0.36

∗∗∗

0.26∗∗

1.19∗∗∗
[ 9.56]
∗∗∗

1.35

[ 8.37]
-1.00∗∗∗
[-5.97]
∗∗∗

[ 2.23]
1.29∗∗∗
[ 12.14]
∗∗∗

1.47

[ 10.99]
-0.58∗∗∗
[-3.63]
∗∗∗

-0.10

-0.14

-0.21∗

[-0.68]

[-1.13]

[-1.92]

0.03

0.02

-0.14

[ 0.16]

[ 0.14]

[-1.26]

-0.06

-0.21

[-0.42]

[-1.44]

1.00∗∗∗

0.97∗∗∗

-0.34∗∗
[-2.46]
0.63∗∗∗

[ 4.70]

[ 5.93]

[ 3.88]

-0.54

-0.53

-0.10

-0.02

-0.04

[-2.74]

[-5.03]

[-5.68]

[-1.10]

[-0.24]

[-0.46]

72.24%

72.67%

75.55%

21.15%

21.53%

16.47%

Table 6, Panel D: IPO Date and ME matching criteria; value-weighted portfolio returns
α
M KTt
SM Bt
HM Lt
U M Dt
2
RAdj.

0.12

0.03

0.06

[ 0.79]

[ 0.20]

[ 0.58]

1.35∗∗∗
[ 6.53]
1.26∗∗∗

1.13∗∗∗
[ 7.53]
1.14∗∗∗

1.11∗∗∗
[ 6.85]
1.09∗∗∗

[ 4.93]

[ 6.81]

[ 7.48]

-0.18

-0.15

-0.16

[-0.76]

[-0.88]

[-0.77]

-0.56∗∗∗

-0.67∗∗∗

-0.68∗∗∗

0.37∗∗
[ 2.06]
1.49∗∗∗
[ 5.56]
1.26∗∗∗
[ 5.90]
-1.13∗∗∗
[-2.94]
-0.18

0.28∗

0.24∗

-0.25

-0.26

-0.18

[ 1.83]

[ 1.66]

[-1.25]

[-1.62]

[-1.34]

-0.14

-0.25

[-0.48]

[-1.24]

-0.01

-0.24

[-0.02]

[-1.30]

1.38∗∗∗
[ 6.87]
1.38∗∗∗
[ 7.48]
-1.27∗∗∗
[-4.73]
-0.65∗∗∗

1.58∗∗∗
[ 9.07]
1.52∗∗∗
[ 7.53]
-0.92∗∗∗
[-3.53]
-0.74∗∗∗

0.95∗∗
[ 2.38]
-0.39∗∗∗

1.12∗∗∗

-0.46∗∗∗
[-2.81]
-0.43∗∗
[-2.42]
0.76∗∗∗

[ 4.05]

[ 3.29]

-0.02

0.06
[ 0.36]

[-3.59]

[-6.23]

[-6.08]

[-1.28]

[-4.20]

[-5.06]

[-2.70]

[-0.13]

64.38%

61.47%

65.49%

64.14%

66.88%

69.84%

14.39%

22.46%

21.36%

35
Table 7: Do firms self select into the Certify=1 and Certify=0 categories? The results reported
in this table correspond to the second step of the Heckman two-step estimation procedure to
account for firm selection. The regression model is:
½µ
0

Valuei = β Xi + π

φ(γ̂ 0 Zi )
Φ(γ̂ 0 Zi )

¶

µ
Certifyi −

φ(γ̂ 0 Zi )
1 − Φ(γ̂ 0 Ii )

¶

¾
(1 − Certifyi ) + ν i ,
(

where γ̂ is the first-step probit estimate of the selection model Certifyi =

1 iff Wi = Zi γ + η i ≥ 0 ,

0 iff Wi = Zi γ + η i < 0 .
Each regression includes a categorical variable for the IPO year and a constant. Bootstrapped
standard errors, reported in parentheses, correct for the fact that in the estimation of this
regression model we fix γ at the first-stage probit estimate γ̂ (we estimate γ̂ and β̂ for 1,000
resamples with replacement, each of the size of the original data set, and compute bootstrapped
standard errors as in Greene (2003), page 924). ∗∗∗ , ∗∗ , and ∗ indicate statistical significance at
the 1%, 5%, and 10% level, respectively.

π

(1)

(2)

(3)

(4)

Firm Size 1

Firm Size 2

Cash flows

Internet Stock

0.29∗∗

0.22∗∗

0.27∗∗

0.25∗

(0.141)

(0.130)

(0.133)

(0.131)

1.69∗∗∗

2.01∗∗∗

1.66∗∗∗

(0.410)

(0.512)

(0.412)

-0.05∗∗∗

-0.06∗∗∗

-0.05∗∗∗

(0.017)

(0.022)

(0.017)

0.93∗∗∗

1.43∗∗∗

1.42∗∗∗

1.41∗∗∗

(0.217)

(0.122)

(0.121)

(0.124)

-1.34∗∗∗

-1.22∗∗∗

-1.14∗∗∗

-1.14∗∗∗

(0.172)

(0.170)

(0.167)

(0.175)

Log(Assets)
Log(Assets)2
¡
¢
Proceeds
Log IPOAssets
³
´
Shares Offered in IPO
Log Total Shares
Outstanding after IPO
¢
¡
Log Cashflows
Assets

0.14∗∗
(0.055)

Internet Stock Categorical Variable

0.42
(0.219)

IPO Year Fixed Effects

Yes

Yes

Yes

Yes

Flexible form for firm size

Yes

No

No

No

Observations

298

298

293

298

R-squared

52%

55%

56%

55%

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