Ph.D. Candidate of the Department of Economics

I am currently on the Job Market. I will be available for interviews in the 2009 ASSA Meetings in San Francisco.

Endogenous Matching and the Determinants of Underpricing in IPO Markets- Job Market Paper - PDF

Underpricing of initial public offerings, defined by the first-day closing price being higher than the issue price, is a well-documented phenomenon that has been studied extensively in the finance literature. These prior studies have analyzed underpricing only through reduced form regressions on the observed characteristics of the issuer firms and the underwriters. Such an approach, however, yields biased estimates if some of the characteristics are not perfectly observed and there is endogenous matching between the issuers and the underwriters based on both the observed and unobserved charac- teristics. This paper solves the biased estimation problem by putting the IPO process into a two-sided matching framework, and using a novel econometric method to control for the endogenous matching. This methodological improvement brings computational ease and flexibility that allows the use of bank-specific fixed effects to analyze the prefer- ences of match partners rigorously; which, in turn, enables the separation of the market equilibrium sorting effect and the direct influence of the match partners’ characteristics on underpricing. The analysis of the matching shows that underwriters’ reputation and industry-specific experience are the most significant factors in issuer firms’ preferences, while the underwriters prefer bigger and venture-backed firms. According to the result- ing decomposition, only two-thirds of the underwriter reputation effect, which is among the most emphasized determinants of underpricing in the literature, is accounted for by the direct influence.