Underwriter reputation and pricing of risk: evidence from seasoned equity offerings

Underwriter reputation and pricing of risk: evidence from seasoned equity offerings This paper investigates how underwriter-issuer matching choices and firm risks affect the cost of equity issuance. We show that underwriter-issuer matching is not random; it reflects underwriter reputation and risk concerns, issuers’ quality, and equity market conditions. We apply Heckman self-selection estimation model to control for the endogenous underwriter-issuer matching. We find that the matching choice leads to considerable heterogeneity in pricing of issuer systematic and firm-specific risks in seasoned equity offering (SEO) underwriting fees. Low-reputation underwriters require compensation for bearing issuer’s systematic risk but not for firm-specific risk, while high-reputation underwriters do the opposite. Moreover, evidence in this paper suggests that the underwriter-issuer matching decision entails a non-linear relation between SEO spread and underwriter reputation: high- and low- reputation underwriters earn higher spreads than medium-reputation underwriters. Our findings highlight the importance of accounting for underwriter-issuer matching in assessing SEO underwriting contracts. The results are robust to alternative underwriter reputation measure, model specifications, sample periods, and different samples of firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Underwriter reputation and pricing of risk: evidence from seasoned equity offerings

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0420-6
Publisher site
See Article on Publisher Site

References

  • Strategic IPO underpricing, information momentum, and lockup expiration selling
    Aggarwal, RK; Krigman, L; Womack, KL
  • Are there economies of scale in underwriting fees? Evidence of rising external financing costs
    Altinkilic, O; Hansen, RS

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