The Effect of Banking Relationships and Prospectus Transparency on IPO Underpricing

Abstract: This paper investigates whether (1) pre-IPO banking relationships with a potential IPO underwriter, and (2) transparency in the "Use of Proceeds" section in the IPO prospectus, ameliorate asymmetric information problems behind IPO underpricing. If pre-IPO banking relationships and prospectus transparency generate and transmit information to the market, and thus reduce asymmetric information, firms with these characteristics should exhibit lower underpricing when going public. The results indicate no support for any of the hypotheses. However, we find that firms with a greater size of certain financial firm characteristics, including total assets, EBIT and cash, face lower IPO underpricing.