Prestige Without Purpose? Reputation, Differentiation, And Pricing In U.S. Equity Underwriting

Keywords

Equity underwriting; Firm-underwriter matching; Investment banking; Underwriter reputation; Underwriting spreads; Underwriting syndicates

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.

Publication Date

6-1-2015

Publication Title

Journal of Corporate Finance

Volume

32

Number of Pages

41-63

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.jcorpfin.2015.04.002

Socpus ID

84927918039 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84927918039

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