The role of expertise in syndicate formation

Sylvain Bourjade

Journal of Economics & Management Strategy, 2021, vol. 30, issue 4, 844-870

Abstract: In most initial public offerings around the world, an underwriter selects syndicate members and uses their information to set the offering price. The objective of this paper is to develop a model of the “book building” process in which the formation of the syndicate is an endogenous decision variable. I analyze when it may benefit the lead underwriter to select syndicate members with different expertise and to acquire all available information about the value of the shares. I show that the underwriter faces a tradeoff between the cost of extracting information and valuation accuracy. Specifically, when the issuer is a low‐risk firm, the costs of acquiring information are higher than the benefits in terms of price accuracy and forming a specialized syndicate is optimal. However, when retail investors' participation is high enough and when the issuer is a high‐risk and transparent firm, the lead underwriter' optimal strategy is to form a diversified syndicate.

Date: 2021
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