The Strategic Behaviour of Underwriters in Valuing IPOs

This chapter studies whether underwriters strategically select comparable firms when valuing Initial Public Offerings (IPOs), and whether this behavior varies across industries. The idea is that the bias in the choice of comparable firms by underwriters is expected to increase when there is more discretion, and discretion is largely affected by the issuer’s industry. We first show that the peers selected by underwriters have higher valuations than those obtained from alternative selections, and a significant fraction of peers are replaced from the prospectus to post-IPO reports released by affiliated analysts. Then, we document that this behavior is crucially shaped by industry effects. Valuation bias is more pronounced among technology firms, where the discretion in the selection of peers is higher, and lower in the manufacturing industry. Also, the number of peers changed from the underwriter’s selection to that of affiliated analysts is larger in the technology industry and among more diversified firms.