In the mid-1990s, 30% of firms completing an SEO within three years of their IPO switched lead underwriter. This article provides evidence on why they switched. Contrary to predictions of prior research, there is little evidence that firms switch due to dissatisfaction with underwriter performance at the time of the IPO. A surprising result is that switchers’ IPOs were significantly less underpriced than non-switchers’ IPOs. However, switchers raised fewer proceeds than expected, compared to the mid-point of the filing range, while non-switchers raised significantly more proceeds. There are two main reasons for switching. Firms graduate to higher reputation underwriters, and they strategically buy additional and influential analyst coverage from the new lead underwriter. Survey results support these conclusions.

Managers usually do not sell any of their own shares in an initial public offering but instead wait until the end of the lockup period. We develop a model in which managers strategically underprice IPOs to maximize personal wealth from selling shares at lockup expiration. First-day underpricing generates information momentum by attracting attention to the stock and thereby shifting the demand curve for the stock outwards. This allows managers to sell shares at the lockup expiration at prices higher than they would otherwise obtain. We test the model on a sample of IPOs in the 1990s. We find that higher ownership by managers is positively correlated with first-day underpricing, underpricing is positively correlated with research coverage, and research coverage is positively correlated with stock returns and insider selling at the lockup expiration. These results are consistent with the model.