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Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting

Listed author(s):
  • Fernando, Chitru S.
  • Gatchev, Vladimir A.
  • May, Anthony D.
  • Megginson, William L.
Registered author(s):

    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0929119915000474
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    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 32 (2015)
    Issue (Month): C ()
    Pages: 41-63

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    Handle: RePEc:eee:corfin:v:32:y:2015:i:c:p:41-63
    DOI: 10.1016/j.jcorpfin.2015.04.002
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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