The Role of Independent Financial Advisors in the IPO Process

Abstract: The European Initial Public Offering (IPO) market has seen an important innovation within the last decade: the increasing participation of Independent Financial Advisors (IFA) in the IPO process. Using data from 373 Western European IPOs between January 2012 and February 2019, this paper applies a multivariate regression model to examine the potential impact of IFAs on IPO underpricing, a phenomenon that refers to the persistence of significant, positive initial returns for shares issued in an IPO. The analysis presented shows that firms which engaged an IFA for their IPO exhibit significantly lower underpricing than firms that did not. Specifically, the presence of an IFA leads to a substantial reduction in underpricing of approximately 3.4 percentage points. Moreover, offer price accuracy of the issued shares is significantly higher for IPOs advised by an IFA. These results suggest a beneficial effect of IFAs on IPO pricing. A binary response model is applied to the data, identifying common patterns in firm characteristics, to examine what type of companies appoint an IFA. The applied probit model suggests that larger firms, pre-IPO Venture Capital owned firms, and firms belonging to the financial industry are significantly more likely to appoint an IFA.