IDEAS home Printed from https://ideas.repec.org/a/eee/jfinin/v21y2012i3p507-529.html
   My bibliography  Save this article

Do underwriters matter? The impact of the near failure of an equity underwriter

Author

Listed:
  • Kovner, Anna

Abstract

The financial crisis provides a natural experiment for testing theoretical predictions of the equity underwriter’s role following an initial public offering. Clients of Bear Stearns, Lehman Brothers, Merrill Lynch, and Wachovia saw their stock prices fall almost 5%, on average, on the day it appeared that these institutions might collapse. The decline was more than 1% lower than the abnormal return of other newly public companies, representing a loss in equity value of almost $3 billion. The price impact was worse for companies with fewer monitors, suggesting that underwriters play an important role in monitoring newly public companies. The abnormal return is more negative for clients that are also lending clients, but is not significantly associated with the role of the underwriter as market maker or counterparty to investors.

Suggested Citation

  • Kovner, Anna, 2012. "Do underwriters matter? The impact of the near failure of an equity underwriter," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 507-529.
  • Handle: RePEc:eee:jfinin:v:21:y:2012:i:3:p:507-529
    DOI: 10.1016/j.jfi.2012.01.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042957312000022
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jfi.2012.01.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Adam B. Ashcraft, 2005. "Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks," American Economic Review, American Economic Association, vol. 95(5), pages 1712-1730, December.
    2. Hansen, Robert S., 2001. "Do investment banks compete in IPOs?: the advent of the "7% plus contract"," Journal of Financial Economics, Elsevier, vol. 59(3), pages 313-346, March.
    3. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    4. Krigman, Laurie & Shaw, Wayne H. & Womack, Kent L., 2001. "Why do firms switch underwriters?," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 245-284, May.
    5. Hsuan‐Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
    6. Katrina Ellis & Roni Michaely & Maureen O'Hara, 2000. "When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket," Journal of Finance, American Finance Association, vol. 55(3), pages 1039-1074, June.
    7. Brav, Alon & Gompers, Paul A, 1997. "Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    8. Ritter, Jay R. & Zhang, Donghang, 2007. "Affiliated mutual funds and the allocation of initial public offerings," Journal of Financial Economics, Elsevier, vol. 86(2), pages 337-368, November.
    9. Stoll, Hans R., 2003. "Market microstructure," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 9, pages 553-604, Elsevier.
    10. Carter, Richard B & Manaster, Steven, 1990. "Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    11. Ongena, S. & Smith, D.C., 2000. "Bank relationships : A review," Other publications TiSEM 993b88a5-9a0f-42de-9cec-6, Tilburg University, School of Economics and Management.
    12. Lamont, Owen & Polk, Christopher & Saa-Requejo, Jesus, 2001. "Financial Constraints and Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 529-554.
    13. Daniel, Kent, et al, 1997. "Measuring Mutual Fund Performance with Characteristic-Based Benchmarks," Journal of Finance, American Finance Association, vol. 52(3), pages 1035-1058, July.
    14. Jain, Bharat A. & Kini, Omesh, 1999. "On investment banker monitoring in the new issues market," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 49-84, January.
    15. Hansen, Robert S & Torregrosa, Paul, 1992. "Underwriter Compensation and Corporate Monitoring," Journal of Finance, American Finance Association, vol. 47(4), pages 1537-1555, September.
    16. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    17. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2005. "Thy Neighbor's Portfolio: Word‐of‐Mouth Effects in the Holdings and Trades of Money Managers," Journal of Finance, American Finance Association, vol. 60(6), pages 2801-2824, December.
    18. Ritter, Jay R., 2003. "Investment banking and securities issuance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 5, pages 255-306, Elsevier.
    19. James, Christopher, 1992. "Relationship-Specific Assets and the Pricing of Underwriter Services," Journal of Finance, American Finance Association, vol. 47(5), pages 1865-1885, December.
    20. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    21. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    22. Alexander Ljungqvist & Felicia Marston & William J. Wilhelm, 2006. "Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations," Journal of Finance, American Finance Association, vol. 61(1), pages 301-340, February.
    23. Seppi, Duane J, 1992. "Block Trading and Information Revelation around Quarterly Earnings Announcements," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 281-305.
    24. Somnath Das & Re‐Jin Guo & Huai Zhang, 2006. "Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms," Journal of Finance, American Finance Association, vol. 61(3), pages 1159-1185, June.
    25. Richard B. Carter & Frederick H. Dark & Ajai K. Singh, 1998. "Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks," Journal of Finance, American Finance Association, vol. 53(1), pages 285-311, February.
    26. Roger D. Huang, 2002. "The Quality of ECN and Nasdaq Market Maker Quotes," Journal of Finance, American Finance Association, vol. 57(3), pages 1285-1319, June.
    27. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-686.
    28. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    29. Cowen, Amanda & Groysberg, Boris & Healy, Paul, 2006. "Which types of analyst firms are more optimistic?," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 119-146, April.
    30. Lily Fang & Ayako Yasuda, 2009. "The Effectiveness of Reputation as a Disciplinary Mechanism in Sell-Side Research," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3735-3777, September.
    31. Suzuki, Katsushi, 2010. "Do the equity holding and soundness of bank underwriters affect issue costs of SEOs?," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 984-995, May.
    32. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. "The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-266, March.
    33. Cem Demiroglu & Michael Ryngaert, 2010. "The First Analyst Coverage of Neglected Stocks," Financial Management, Financial Management Association International, vol. 39(2), pages 555-584, June.
    34. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
    35. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    36. Jenkinson, Tim & Ljungqvist, Alexander, 2001. "Going Public: The Theory and Evidence on How Companies Raise Equity Finance," OUP Catalogue, Oxford University Press, edition 2, number 9780198295990, April.
    37. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nathan Foley-Fisher & Stefan Gissler & Stephane Verani, 2019. "Over-the-Counter Market Liquidity and Securities Lending," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 272-294, July.
    2. Chen, Hsuan-Chi & Ho, Keng-Yu & Weng, Pei-Shih & Yeh, Chia-Wei, 2020. "The role of equity underwriting relationships in mergers and acquisitions," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    3. Chen, Hsuan-Chi & Ho, Keng-Yu & Weng, Pei-Shih, 2013. "IPO underwriting and subsequent lending," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5208-5219.
    4. Dick-Nielsen, Jens & Nielsen, Mads Stenbo & von Rüden, Stine Louise, 2021. "The value of bond underwriter relationships," Journal of Corporate Finance, Elsevier, vol. 68(C).
    5. Gao, Ya & Liao, Chi & Zhang, Ying & Zhang, Zixu, 2021. "The role of investor protections on the value of investment banking relationships: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    6. May, Anthony D., 2014. "Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 410-429.
    7. Nathan Foley-Fisher & Stefan Gissler & Stephane Verani, 2019. "Over-the-Counter Market Liquidity and Securities Lending," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 272-294, July.
    8. Dumontaux, Nicolas & Pop, Adrian, 2013. "Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers," Journal of Financial Stability, Elsevier, vol. 9(3), pages 269-286.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Trauten, Andreas, 2004. "Zur Effizienz von Wertpapieremissionen über Internetplattformen," Working Papers 8, University of Münster, Competence Center Internet Economy and Hybrid Systems, European Research Center for Information Systems (ERCIS).
    2. Reber, Beat & Vencappa, Dev, 2016. "Deliberate premarket underpricing and aftermarket mispricing: New insights on IPO pricing," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 18-33.
    3. Reber, Beat, 2017. "Does mispricing, liquidity or third-party certification contribute to IPO downside risk?," International Review of Financial Analysis, Elsevier, vol. 51(C), pages 25-53.
    4. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    5. Jeon, Jin Q. & Lee, Cheolwoo & Nasser, Tareque & Via, M. Tony, 2015. "Multiple lead underwriter IPOs and firm visibility," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 128-149.
    6. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T. & Pisciotta, Kevin, 2018. "The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 302-330.
    7. Evgeny Lyandres & Fangjian Fu & Erica X. N. Li, 2018. "Do Underwriters Compete in IPO Pricing?," Management Science, INFORMS, vol. 64(2), pages 925-954, February.
    8. Altınkılıç, Oya & Balashov, Vadim S. & Hansen, Robert S., 2019. "Investment bank monitoring and bonding of security analysts’ research," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 98-119.
    9. Chen, Chao & Shi, Haina & Xu, Haoping, 2014. "The IPO underwriting market share in China: Do ownership and quality matter?," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 177-189.
    10. Juyoun Ryoo & Cheolwoo Lee & Jin Q Jeon, 2020. "Sustainability of Analyst Recommendations in Multiple Lead Underwriter IPOs," Sustainability, MDPI, vol. 12(5), pages 1-36, March.
    11. Fernando, Chitru S. & Gatchev, Vladimir A. & May, Anthony D. & Megginson, William L., 2015. "Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 41-63.
    12. Mola, Simona & Guidolin, Massimo, 2009. "Affiliated mutual funds and analyst optimism," Journal of Financial Economics, Elsevier, vol. 93(1), pages 108-137, July.
    13. Krigman, Laurie & Shaw, Wayne H. & Womack, Kent L., 2001. "Why do firms switch underwriters?," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 245-284, May.
    14. Smart, Scott B. & Zutter, Chad J., 2003. "Control as a motivation for underpricing: a comparison of dual and single-class IPOs," Journal of Financial Economics, Elsevier, vol. 69(1), pages 85-110, July.
    15. Kaneko, Takashi & Pettway, Richard H., 2003. "Auctions versus book building of Japanese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 439-462, September.
    16. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
    17. Walter Boudry & Jarl Kallberg & Crocker Liu, 2011. "Analyst Behavior and Underwriter Choice," The Journal of Real Estate Finance and Economics, Springer, vol. 43(1), pages 5-38, July.
    18. Hoque, Hafiz & Mu, Shaolong, 2021. "Does a reduction of state control affect IPO underpricing? Evidence from the Chinese A-share market," Journal of International Money and Finance, Elsevier, vol. 115(C).
    19. Gonzalez, Laura & James, Christopher, 2007. "Banks and bubbles: How good are bankers at spotting winners?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 40-70, October.
    20. Su, Chen, 2015. "Does institutional reform improve the impact of investment bank reputation on the long-term stock performance of initial public offerings?," The British Accounting Review, Elsevier, vol. 47(4), pages 445-470.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinin:v:21:y:2012:i:3:p:507-529. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/622875 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622875 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.