Does underwriter rating matter? Evidence from seasoned equity offerings in an emerging market

We examine the impact of underwriting rating on seasoned equity offering (SEO) discount in China. The China Securities Regulatory Commission has adopted an underwriting rating system since 2010, although it remains unclear whether such a rating system is able to translate into a lower SEO discount and a higher cumulative abnormal returns so that SEO firms are able to leave less money on the table. Our findings are consistent with the underwriter general ability hypothesis. That is, an underwriter's general ability as reflected in its rating contributes to a lower SEO discount. The findings are robust to a battery of alternative specifications, after accounting for selectivity bias, and accounting for underwriter reputation. In addition, we show that the rating system reflects the multi-dimensional ability of the underwriter. We document that without an underwriter rating variable, the conventional underwriter reputation measure (using relative underwriting market share) is negatively related to the SEO discount. After incorporating the underwriter rating variable, it dominates the conventional underwriter reputation measures in explaining the SEO discount. Finally, we document that a highly rated underwriter is associated with firms having lower accrual-based and real earnings management. Some policy implications are discussed.