Prestige without purpose? Reputation, differentiation, and pricing in US equity underwriting
Fernando, Chitru S.
Gatchev, Vladimir A.
May, Anthony D.
Megginson, William L.
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Fernando, Chitru S.; Gatchev, Vladimir A.; May, Anthony D.; Megginson, William L. 2015. Prestige without purpose? Reputation, differentiation, and pricing in US equity underwriting. Journal of Corporate Finance, vol. 32, June 2015:pp 41–63
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. (C) 2015 Published by Elsevier B.V.
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