The Information Advantage of Underwriters in IPOs

Using a unique dataset of dealer-level trading data on recent IPOs, we find strong evidence that lead underwriter trades are significantly related to subsequent IPO abnormal returns among bookbuilding IPOs. This relation is concentrated among issues with the highest information asymmetry and underwriters with the most industry experience. In contrast, we find no similar relation for trades by other syndicate members. We also find no relation among a sample of auction IPOs. Our results are consistent with the joint hypothesis that underwriters of bookbuilding IPOs gain unique insight on the values of these client firms, and that they trade on this information advantage.