Academic journal article Review of Business

Factors That Impact Customer Loyalty in the Investment Banking Industry

Academic journal article Review of Business

Factors That Impact Customer Loyalty in the Investment Banking Industry

Article excerpt

Executive Summary

The main goal of this article is to provide empirical evidence about some factors that impact customer loyalty in the investment banking industry sector. We find that only 45.11% of our sample repeated dealings with the same lead investment bank during the first seasoned equity offering (SEO). Our results suggest that customer loyalty has been declining in the securities firm industry during last decade. Also, we find that the number of days between offerings has a negative relationship with the probability of a firm to remain loyal to the same underwriter. We also find that firms with IPOs offered during 1999 and 2000 have a higher probability of underwriting loyalty during their first SEO; however, this relationship disappears during the second and third SEO. Similarly, we find that underwriter reputation has explanatory power over the probability of a firm's loyalty to the same underwriter only during the first SEO.

Introduction

The main goal of this article is to provide empirical evidence about some factors that impact customer loyalty in the investment banking industry sector. We define customer loyalty as those firms that repeat dealings with the same lead investment bank or underwriter. We study a sample of 552 initial public offerings (IPOs) of firms that engaged in one or more seasoned equity offerings (SEOs). We find that firms that remain loyal during their first SEO experience an average underpricing of 16.59% while disloyal ones have an average underpricing of 22.32%. Our results contradict those of Krigman, Shaw, and Womack (2001), who find that loyal IPOs are significantly less underpriced than disloyal IPOs. However, our results are consistent with those of James (1992) who finds significantly lower levels of underpricing when firms remain loyal to the same underwriter than when firms switch underwriters.

Since all IPOs in our sample have one or more seasoned equity offerings (SEOs), our analysis goes beyond the first SEO. Specifically, our study tries to analyze whether the factors that influence a firm's loyalty to the same lead underwriter during its first SEO also explain such loyalty for its second and third SEO. This constitutes the main differentiating factor of our study compared to previous academic works. Indeed, Krigman, Shaw, and Womack (2001) study firms that conducted an IPO from 1993-1995, which then offered just one SEO within three years following their IPOs. James (1992) studies a sample of 520 IPOs, of which 121 (23%) made at least one security offer after their IPO, but only 24 have a first 5E0,18 a second SEO, and just five have a third SEO. James did not discriminate between debt and equity issues in his analyses, and this constitutes a significant difference with our sample of firms where we only considered equity offerings after the IPO. Also, the small number of first, second, and third SEOs did not allow James to perform meaningful statistical analysis considering each offering individually. Our sample is large enough to derive meaningful conclusions of each offering considered individually.

Our results suggest that the customer loyalty during the first seasoned equity offering is unique, and that not all the same factors can explain why firms switch underwriters in their second and third SEOs. Our results may prove to be extremely valuable for the securities firm industry, since those factors that explain customer loyalty in several offerings can be considered by investment banks to improve the services they provide. The value of our proposed research work is also reflected by our summary statistics: just 45.1% of our sample remained loyal to the same underwriter during their first SEO. This constitutes a significant reduction compared to the 70% reported by Krigman, Shaw, and Womack (2001) and the 65% reported by James (1992). Our results, compared to previous academic works, suggest that customer loyalty has declined over the last couple of decades. …

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