The role of investment bankers in security offerings: An empirical study of underwriter reputation

• Main Author: Werner, Adam Davis
• Format: Dissertation
• Language: English
• Published: ProQuest Dissertations & Theses 01-01-1999
• Subjects: Banking; Finance
• ISBN: 0599566183; 9780599566187

Much theoretical and empirical research has been done on the role that investment banks' reputations play in the acquisition of capital. While theoretical work in this area has begun to treat reputation as a dynamic phenomenon, quantitative research has yet to do so. This work bridges the gap between theory and quantitative work by creating a dynamic measure of underwriter quality based on the theoretical treatment of underwriter reputation. Specifically, this work constructs a quantitative measure of underwriter reputation based on an underwriter's long-run performance which captures the idea that investors form opinions as to whether an underwriter is “good” or “bad” based on the performance of the underwriter's prior offerings. The impact of an underwriter's reputation on the market reaction to public security offerings is estimated using the dynamic measure constructed within this work. These offerings take two forms; Initial Public Offerings (IPOs) and Seasoned Equity Offerings (SEOs). In the case of SEOs, this work shows that the market reaction to an offering announcement is increasing in underwriter reputation. This suggests that using a “good” underwriter can help to reduce the impact of asymmetric information on an SEO. In the case of IPOs, the results are mixed. In some cases the price run-up associated with an IPO issuance is increasing in underwriter reputation. In other cases, it is decreasing. These conflicting findings come about as a result of changing the functional form of the underwriter proxy. As a result, one is left asking whether the theoretical literature has properly defined underwriter reputation in the IPO setting.