Prestige without Purpose? Reputation, Differentiation, and Pricing in U.S. Equity Underwriting

Chitru S. Fernando, Vladimir A. Gatchev, Anthony D. May and William L. Megginson
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Chitru S. Fernando: University of OK
Vladimir A. Gatchev: University of Central FL
Anthony D. May: Wichita State University
William L. Megginson: University of OK

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: Clustering of IPO underwriting spreads at 7% poses two important puzzles: Is the market for U.S. equity underwriting services anti-competitive and why do equity underwriters invest in reputation-building? This study helps resolve both puzzles. Modeling endogeneity of firm-underwriter choice using a two-sided matching approach, we provide strong evidence of price and service differentiation based on underwriter reputation. High-reputation banks receive average reputational premia equaling 0.65% (0.47%) of average IPO (SEO) underwritten proceeds, which constitutes 10% (13%) of their underwriting spreads. Equity issuers working with high-reputation underwriters receive significant benefits, including higher offer values and lower percentage spreads net of reputational premia.

JEL-codes: G24 G32 L14 L15 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-fmk and nep-mkt
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Citations: View citations in EconPapers (23)

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