The Process of Ipo
A Guide to the Initial Public Offering Process
Katrina Ellis
(kle3@cornel.edu)
Roni Michaely
(rm34@cornell.edu)
and
Maureen O’Hara
(mo19@cornell.edu)
January 1999
*All Authors are from Cornell University, Johnson Graduate School of Management,
Cornell University Ithaca NY 14853. Michaely is also affiliated with Tel-Aviv University.
A Guide to the Initial Public Offering Process
A milestone for any company is the issuance of publicly traded stock. While the motivations for an initial public offering are straightforward, the mechanism for doing so is complex. In this paper, we outline the process by which companies are brought to market in an initial public offering. Our goals here are to delineate the specific steps that are required in an IPO, to demonstrate the complex inter-relationships between the advising, marketing, pricing, and trading functions of the IPO process, and to highlight the role played by the underwriter in a public offering.
When a company wishes to make a public offering, its first step is to select an investment bank to advise it and to perform underwriting functions in connection with the issue. The selection process relies on the investment banker’s general reputation and expertise as well as on the quality of its research coverage in the company’s specific industry. The selection also depends on whether the issuer would like to see its securities held more by individuals or by institutional investors (i.e., the investment bank’s distribution expertise). Prior banking relationships the issuer and members of its board
(especially the venture capitalists) have with specific firms in the investment banking community also influence the selection outcome. Often, the selection process is a two-way affair, with the reputable investment banker choosing its clients at least as carefully as the company should choose the investment banker.
The most common type of underwriting arrangement involved with large issues
Katrina Ellis
(kle3@cornel.edu)
Roni Michaely
(rm34@cornell.edu)
and
Maureen O’Hara
(mo19@cornell.edu)
January 1999
*All Authors are from Cornell University, Johnson Graduate School of Management,
Cornell University Ithaca NY 14853. Michaely is also affiliated with Tel-Aviv University.
A Guide to the Initial Public Offering Process
A milestone for any company is the issuance of publicly traded stock. While the motivations for an initial public offering are straightforward, the mechanism for doing so is complex. In this paper, we outline the process by which companies are brought to market in an initial public offering. Our goals here are to delineate the specific steps that are required in an IPO, to demonstrate the complex inter-relationships between the advising, marketing, pricing, and trading functions of the IPO process, and to highlight the role played by the underwriter in a public offering.
When a company wishes to make a public offering, its first step is to select an investment bank to advise it and to perform underwriting functions in connection with the issue. The selection process relies on the investment banker’s general reputation and expertise as well as on the quality of its research coverage in the company’s specific industry. The selection also depends on whether the issuer would like to see its securities held more by individuals or by institutional investors (i.e., the investment bank’s distribution expertise). Prior banking relationships the issuer and members of its board
(especially the venture capitalists) have with specific firms in the investment banking community also influence the selection outcome. Often, the selection process is a two-way affair, with the reputable investment banker choosing its clients at least as carefully as the company should choose the investment banker.
The most common type of underwriting arrangement involved with large issues
References: Aggarwal, R., 1998, “Stabilization Activities by Underwriters after New Offerings,” Working Paper, Georgetown University. Chen. H. and J. Ritter, 1998, “The seven percent solution,” Working Paper, University of Florida, Gainesville, FL. Ellis, K, R. Michaely, and M. O’Hara, 1999a, “When the underwriter is the market maker: An examination of trading in the IPO Aftermarket,” Working Paper, Cornell University, Ellis, K, R. Michaely, and M. O’Hara, 1999b, “The market microstructure of IPOs”, Work in progress, Cornell University, Ithaca NY. Michaely, R. and K. Womack, 1998, “Conflict of interest and the credibility of underwriter Working Paper, Cornell University, Ithaca NY. Ritter, J., 1991, "The Long-Run Performance of Initial Public Offerings," Journal of Finance 46, 3-27.