Abstract

The certification role of investment banks in the initial public offering (IPO) market has been well documented. Extant literature reports a negative relationship between the prestige of the investment banker and both the first-day price run-up (Carter and Manaster (1990) and long run performance of IPOs (Michaely and Shaw (1994)). However, the robustness of this relationship under different market conditions, particularly in times of greater uncertainty and increased market volatility, has not been tested. Using data on U.S. IPOs from 1996 to 2000, a "historical period" in the stock market, this paper addresses the following three research questions: (1) Do previous findings with respect to the relationship between investment banker prestige and performance of IPOs continue to hold in the "NASDAQ bubble" era? (2) Which issuer characteristics influence a prestigious investment banker's decision to underwrite an individual IPO in a hot issue market? (3) Does the choice of a reputable investment banker to underwrite the IPO help the issuing firm to reduce other costs, such as liquidity costs, associated with its IPO?