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
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)
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