Does skill matter? - A study on the relationship between cornerstone investors and underpricing in the Swedish IPO market

Sammanfattning: Swedish IPOs backed by cornerstone investors have increased from 10% of all IPOs in 2014 to 90% of all IPOs in January to September of 2020. Although theories regarding IPO underpricing are well developed, the connection to cornerstone investors has not yet been fully covered in financial research. This paper uses a data set including 168 IPOs, of which 118 are cornerstone backed, in the Swedish stock market during the period from 2014 to September 2020, to investigate the relationship between cornerstone investors and IPO underpricing. By performing two-sided t-tests, conclusive evidence is found that both IPOs in general and cornerstone backed IPOs in particular have been underpriced in this period, experiencing an average underpricing of 10.0% and 12.8%, respectively. Furthermore, by performing a multivariate regression analysis, this paper finds conclusive evidence that the share of an offering allocated to cornerstone investors has been significantly positively related to underpricing. Moreover, results from an additional multivariate regression analysis indicate that IPOs backed by at least one skilled cornerstone investor have experienced a stronger relationship to underpricing than that of IPOs backed solely by unskilled cornerstone investors. The results provide further evidence supporting theories explaining underpricing which have been suggested in previous research and derived from interviews with investment banks, mainly the negotiation effect, demand effect, cherry picking effect, and possibly the allocation effect and crowding out effect. Furthermore, the results provide evidence suggesting that the certification effect, derived from informational asymmetry theories, is not as strong as other effects presented in this paper on underpricing in Swedish IPOs during the sample period. The results also provide novel insights regarding the relationship between skilled cornerstone investors and IPO underpricing. This paper's findings warrant further research on IPO underpricing in the context of cornerstone investors.