Underwriter syndication and corporate governance

Underwriter syndication and corporate governance The main purpose of this paper is to examine underwriters’ response to issuers’ ineffective corporate governance. Given the growing importance of corporate governance for the success of equity offerings, we examine this response using a sample of seasoned equity offerings (SEOs). Previous studies suggest various rationales behind underwriter syndication, such as risk sharing, market-making, information production, certification, and monitoring. We offer an information-asymmetry-reduction hypothesis for the persistence of underwriter syndication. We argue that less effective corporate governance decreases information credibility, which, in turn, increases information asymmetry, leading underwriters to increase syndicate size to mitigate subsequent agency problems. Consistent with this prediction, we find that the size of the underwriter syndication is inversely related to proxies that measure the effectiveness of corporate governance. Results remain robust even after controlling for other confounding factors. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Underwriter syndication and corporate governance

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Publisher
Springer US
Copyright
Copyright © 2010 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-010-0219-7
Publisher site
See Article on Publisher Site

Abstract

The main purpose of this paper is to examine underwriters’ response to issuers’ ineffective corporate governance. Given the growing importance of corporate governance for the success of equity offerings, we examine this response using a sample of seasoned equity offerings (SEOs). Previous studies suggest various rationales behind underwriter syndication, such as risk sharing, market-making, information production, certification, and monitoring. We offer an information-asymmetry-reduction hypothesis for the persistence of underwriter syndication. We argue that less effective corporate governance decreases information credibility, which, in turn, increases information asymmetry, leading underwriters to increase syndicate size to mitigate subsequent agency problems. Consistent with this prediction, we find that the size of the underwriter syndication is inversely related to proxies that measure the effectiveness of corporate governance. Results remain robust even after controlling for other confounding factors.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Dec 7, 2010

References

  • Robust financial contracting and the role of venture capitalists
    Admati, A; Pfleiderer, P
  • Are there economies of scale in underwriting fees? Evidence of rising external financing costs
    Altinkiliç, O; Hansen, R
  • The determinants of corporate board size and composition: an empirical analysis
    Boone, A; Field, L; Karpoff, J; Raheja, C
  • Investment analysis and price formation in securities markets
    Brennan, M; Subrahmanyam, A
  • Divergence of opinion and initial public offerings
    Chen, H; Guo, W
  • Corporate governance, chief executive officer compensation and firm performance
    Core, J; Holthausen, R; Larcker, D

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