The Impact of Underwriter’s Reputation on the Price of Capital, the Return and the Underwriter Selection

Table of Contents

1. Introduction

2. How Reputation is Measured

2.1 Tombstone Announcement Measure

2.2 Market Share Measure

3. The Relationship between Underwriter Reputation and Issue Pricing

3.1 Overpricing, Underpricing and Asymmetric Information

3.2 The Underpricing Equilibrium

3.3 Price Support

4. Fees and Proceeds

4.1 Fees

4.2 Proceeds

5. Commercial vs. Investment Banks

6. How Are Underwriters Being Chosen and Why Do Companies Switch Underwriters?

7. Conclusion

8. List of References

Research Objectives and Core Themes

This paper examines the influence of underwriter reputation on capital market outcomes, specifically investigating its impact on issue pricing, underwriter compensation, and the strategic selection or switching of underwriters by issuing firms.

• The correlation between underwriter prestige and capital issue pricing.
• Methodological approaches to measuring underwriter reputation.
• The certification effect and its role in mitigating information asymmetry.
• Comparison of commercial versus investment banks in underwriting roles.
• Mechanics and drivers behind the firm-underwriter selection and switching process.

Excerpt from the Book

Summary of Chapters

1. Introduction: The introduction outlines the necessity of underwriters in capital markets and establishes the primary research objective regarding the impact of reputation on capital issuance.

2. How Reputation is Measured: This chapter defines the two primary methodologies, the Tombstone Announcement Measure and the Market Share Measure, used to quantify underwriter prestige.

3. The Relationship between Underwriter Reputation and Issue Pricing: This section analyzes how reputation mitigates asymmetric information through certification and price support, establishing the concept of an underpricing equilibrium.

4. Fees and Proceeds: The chapter explores the mixed empirical evidence regarding whether prestigious underwriters charge higher fees or if they seek higher market share through fee competition, alongside the impact on long-run proceeds.

5. Commercial vs. Investment Banks: This chapter examines why issuers choose commercial banks over investment banks, highlighting the role of prior lending relationships and private-debt reputation.

6. How Are Underwriters Being Chosen and Why Do Companies Switch Underwriters?: The text discusses the mutual selection process and the “graduation effect” as primary reasons for firms switching underwriters after their initial public offering.

7. Conclusion: The conclusion summarizes the finding that underwriter reputation is a critical variable in reducing information asymmetry, influencing pricing strategies, and determining the long-term success of an issuance.

8. List of References: This section provides the comprehensive bibliography of academic studies and journals referenced throughout the paper.

Keywords

Underwriter Reputation, Capital Issuance, Certification Effect, Asymmetric Information, Underpricing Equilibrium, Price Support, Investment Banks, Commercial Banks, Tombstone Announcement, Market Share, IPO, SEO, Graduation Effect, Financial Intermediation, Issue Pricing.

Frequently Asked Questions

What is the core focus of this research?

The research focuses on the impact of underwriter reputation on various facets of capital market transactions, including pricing strategies, fee structures, and the strategic decisions made by issuers.

What are the central themes discussed?

The central themes include the measurement of underwriter reputation, the reduction of information asymmetry, the certification role of banks, and the dynamics of issuer-underwriter selection.

What is the primary objective of the study?

The goal is to determine how prestigious underwriters use their reputation to influence the pricing of capital issues and to investigate why companies engage in specific behaviors, such as switching underwriters.

Which scientific methodology is employed?

The paper utilizes a meta-analytical approach, synthesizing existing empirical literature and academic research findings to evaluate the relationship between reputation and market outcomes.

What is covered in the main body of the work?

The main body covers the quantification of reputation, the theoretical link between reputation and pricing (including overpricing/underpricing), the comparison of bank types, and the reasons for underwriter switching.

What are the primary keywords that characterize this paper?

The work is defined by terms such as Underwriter Reputation, Certification Effect, Asymmetric Information, IPO, and Market Share.

How does a commercial bank compete with an investment bank in underwriting?

Commercial banks leverage their existing lending relationships and the reputation built in private-debt markets to provide "lending-related issue certification," which helps mitigate investor concerns regarding opportunistic behavior.

Why do companies choose to switch underwriters after an IPO?

Companies typically switch not due to dissatisfaction with the IPO performance, but to "graduate" to more prestigious underwriters who offer better research coverage, thereby reducing perceived information asymmetry.