Underwriter reputation and pricing of risk: evidence from seasoned equity offerings

Cathy Cao (), Chongyang Chen () and Joyce Wang ()

Review of Quantitative Finance and Accounting, 2015, vol. 44, issue 4, 609-643

Abstract: This paper investigates how underwriter-issuer matching choices and firm risks affect the cost of equity issuance. We show that underwriter-issuer matching is not random; it reflects underwriter reputation and risk concerns, issuers’ quality, and equity market conditions. We apply Heckman self-selection estimation model to control for the endogenous underwriter-issuer matching. We find that the matching choice leads to considerable heterogeneity in pricing of issuer systematic and firm-specific risks in seasoned equity offering (SEO) underwriting fees. Low-reputation underwriters require compensation for bearing issuer’s systematic risk but not for firm-specific risk, while high-reputation underwriters do the opposite. Moreover, evidence in this paper suggests that the underwriter-issuer matching decision entails a non-linear relation between SEO spread and underwriter reputation: high- and low- reputation underwriters earn higher spreads than medium-reputation underwriters. Our findings highlight the importance of accounting for underwriter-issuer matching in assessing SEO underwriting contracts. The results are robust to alternative underwriter reputation measure, model specifications, sample periods, and different samples of firms. Copyright Springer Science+Business Media New York 2015

Keywords: Seasoned equity offering; Investment bank; Underwriter; Reputation; Risk; Gross spread; G24; G32; L14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-013-0420-6

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