Recent discussion here on Going Private has led me to speculate about the "IPO expertise" in U.S. Capital Markets. My interest is connected to a piece by Jeff Matthews or Peter Cohan (I can't tell which because both were written on the same day and are almost exactly the same) and the assertion by Daniel Gross for slate.com that with respect to global capital markets "...the United States... is more expensive and not particularly efficient at IPOs."
Poking around on the subject I found an older (August 1999) Fernando, Krishnamurthy and Spindt paper out of Wharton's Financial Institutions Center titled "Offer price, target ownership structure and IPO performance" (.pdf file) the findings of which suggest, among other things (from the abstract):
...that firms select their IPO offer prices to target a desired ownership structure, which in turn has implications for underpricing and post-IPO performance. Higher priced IPOs are marketed by more reputed underwriters and attract a relatively larger institutional investment. These IPOs are relatively more underpriced, possibly as compensation for the monitoring and information benefits provided by institutional investors. IPOs whose offer prices are below the median level seem to be targeted towards a retailed investor clientele. These IPOs are also relatively more underpriced, possibly as a cost of adverse selection. Our finding that long-run performance increases with offer price confirms that higher priced IPOs are better firms.
And later:
We find that instituional ownership increases with offer price. Controlling for firm size, offer fraction, underwriter reputation and other variables thought to influence IPO pricing, we find that underpricing is a U-shaped function of offer price.
Our findings are consistent with the characterization of high-priced IPOs as targeted towards institutions in which case underpricing compensates the institutions for information and future monitoring services. Firms could choose a low offer price and discourage institutional investment to either preserve private control benefits or to avoid potentially costly investor myopia. The resulting pooling equilibrium could lead to higher underpricing. Our results also suggest that the offer price is positively related to the likelihood that the firm will remain viable after five years.
Of course, the authors might have drawn different conclusions had the IPO scandals and the "Friends of Frank" behaviors of the era been understood at the time, (and, in fact, other works I cite below find exactly this- that agency problems contributed to underpricing woes) but the point remains: IPO pricing is a complex dynamic among sophisticated players. This makes me doubt the value of same-day IPO price fluxuations as a proxy for "IPO efficiency," and the paper points out nicely that many other factors not only may bring long term value to a firm, such as institutional monitoring or analyst coverage, but that players in the IPO game are aware of these nuances and that they presumably impact price. In short, simple analysis of same day price variances are not a good proxy for "IPO efficiency." But then, if you are a consulting firm doing a study for the London Stock Exchange, the simple analysis serves you(r client) much better.
Still, let's see if we can't uncover some details about the "performance" of different IPOs by underwriter.
Opinions vary. Koop, Lee "Valuations of IPO and SEO firms" (.pdf file) (May 2001) doubts any underwriter reputational advantage exists noting that "Theories regarding underwriter reputation or windows of opportunity for equity issuance are not supported in our empirical results." Guner, Onder and Rhoades find that underwriter reputation seems to matter for emerging markets in "Underwriter Reputation and Short-Run IPO Returns: A Re-Evaluation for an Emerging Market." (.pdf file) confirming my suspicion at least that IPO markets vary significantly by country, and Binay, Gatchev and Pirinsky give us "How Important Are Relationships for IPO Underwriters and Institutional Investors?" (.pdf file) (January 2006) which finds, among other things that:
...underwriters favor institutions they have previously worked with when allocating Initial Public Offerings (IPOs). Regular investors benefit more than casual investors in IPOs by participating more in underpriced issues. Relationship participations are more important in the distribution of IPOs with stronger demand, IPOs of less liquid firms, and deals by less reputable underwriters. Overall, our results are consistent with book-building theories of IPOs and suggest that regular investors improve the efficiency of the IPO process. Interestingly, our results are weaker for 1999-2000, consistent with the idea that in this period other considerations (e.g., commission revenues from clients) affected the allocations of IPOs.
...and that...
Underwriter reputation, while not explicitly modeled in the book-building theories, could also be linked to relationship participations. If underwriters with higher reputation produce better information about the IPO (Carter and Manaster, 1990) then IPOs underwritten by such underwriters will have less need for the participation of relationship investors for information production. In support of this prediction, we find that IPOs underwritten by banks with higher Carter-Manaster ranks have lower relationship participation.
The implication is that higher reputation underwriters need less "regular investors" (i.e. repeat investors in IPOs by the same underwriter) and therefore need not underprice to the same extent required of underwriters who are more reliant on relationships to place IPO shares.
I've still not found scholarly work exactly on point for the issue at hand, "Does Goldman price IPOs better or worse than the rest of the world," but the search continues.