Top VCs are the underwriters' best clients and thus should get the best service.
Top VC IPOs receive more analyst coverage than non-top VC IPOs.
Top VC IPOs are twice as underpriced as non-top VC IPOs.
Regulatory shocks starting in 2000 eliminated the value of all-star coverage.
The quid pro quo of underpricing for research coverage disappeared.
Before the IPO bubble burst, the first day return for IPOs backed by top VC firms was double that of non-top VC IPOs. Top VC IPOs were also twice as likely to receive all-star analyst coverage and suffered twice as large negative returns upon lockup expiration. We argue that this was not a coincidence. Underwriters benefited from underpricing vis-à-vis allocation strategies whereas VCs gain from information momentum which allows them to cash-out at higher prices at lockup expiration. All-stars are a scarce resource underwriters allocate to their best clients (top VCs) who bring them repeat business. Post-bubble, regulatory shocks restricted preferential IPO allocations and reduced the value of all-star coverage. Consequently, these relations disappeared indicating that regulatory changes likely had the desired effect.
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Journal of Corporate Finance
Bradley, D., Kim, I. and Krigman, L., 2015. Top vc ipo underpricing. Journal of Corporate Finance, 31, pp.186-202. https://doi.org/10.1016/j.jcorpfin.2015.01.016