Underwriters in Taiwan have to purchase 10-25% of shares offered in initial public offerings (IPOs) for their own accounts. We present a signalling model showing that the underwriter retention rate can serve as a signal of firm value to investors because underwriters are investors as well. This mechanism can reduce information asymmetry between issuers and investors. The model shows that when underwriters retain more proportion of IPO shares, in equilibrium, the initial return is greater and the subscription success rate is lower. We further test the propositions using 616 IPO firms in Taiwan for the period 1998-2004. Overall, the empirical results support the propositions developed from the signalling model.
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Document Type: Research Article
Department of Finance, Yuan Ze University, 320 Chungli, Taiwan,Anderson School of Management, University of New Mexico, Albuquerque, NM 87131, USA
Graduate Institute of Finance, Fu-Jen Catholic University, 242 Hsinchuang, Taiwan
Department of Finance, Ching-Yun University, 320 Chungli, Taiwan
Publication date: 2007-08-01
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