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

Journal of Corporate Finance, 2015, vol. 32, issue C, 41-63

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.

Keywords: Equity underwriting; Underwriter reputation; Underwriting spreads; Investment banking; Firm-underwriter matching; Underwriting syndicates (search for similar items in EconPapers)
JEL-codes: G24 G32 L14 L15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:32:y:2015:i:c:p:41-63

DOI: 10.1016/j.jcorpfin.2015.04.002

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