Wanna Dance? How Firms and Underwriters Choose Each Other

Abstract

We develop and test a theory explaining the equilibrium matching of issuers and underwriters. We assume that issuers and underwriters associate by mutual choice, and that underwriter ability and issuer quality are complementary. Our model implies that matching is positive assortative, and that matches are based on firms' and underwriters' relative characteristics at the time of issuance. The model predicts that the market share of top underwriters and their average issue quality varies inversely with issuance volume. Various cross-sectional patterns in underwriting spreads are consistent with equilibrium matching. We find strong empirical confirmation of our theory. Copyright 2005 by The American Finance Association.

Cross-Selling Lending and Underwriting: Scope Economies and Incentives

“…Our paper complements Fernando et al (2005). These authors show that more reputable underwriters underwrite issues of firms with lower uncertainty and lower asymmetric information or monitoring needs.…”

Searching in the Pre-IPO Market-Interaction between Private Firms and Investment Banks

“…Their model shows that assets with identical cash flows can trade at different prices due to the existence of short-sellers and search frictions in the spot and the repo markets. This paper is also related to but fundamentally different from Fernando, Gatchev, & Spindt's (2005) matching model in which issuers and underwriters associate by mutual choice and matches are based on firms' and underwriters' relative characteristics at the time of issuance. But they never put the market search friction into consideration when modeling the searching and matching process in the pre-IPO market, thus losing a track of the general picture of IPO processes.…”

“…They analyze the duration of each phase in the cycle and the flow of funds into the market. Duffie, Garleanu & Pedersen (2002, 2005, and Lagos and Rocheteau (2007) are pioneers to introduce search theory to dynamic asset markets. Vayanos and Weill (2008) propose a search-based model to explain the on-the-run phenomenon in the over-the counter (OTC) fixed income markets.…”

Investment Bank Reputation and IPO Qualifications

“…Fernando et al [4] shows that issuers and the underwriters associate by mutual choice, large-scale and high quality issuers more likely choose more prestigious underwriters. Jo et al [5] examines the association between the choice of investment bank and earning management, and the results show that there is an inverse association between underwriter quality and earning management, and underwriter quality is positively related to SEOs' post-issue performance.…”