Assortative Matching and Reputation in the Market for First Issues

Using a tractable structural model of the matching equilibrium between underwriters and equity-issuing firms, we study the determinants of value in underwriter–firm relationships. Our estimates imply that high underwriter prestige is associated with 5.3%–14.1% greater equilibrium surplus. According...

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Bibliographic Details
Published in:Management science 2021-04, Vol.67 (4), p.2049-2074
Main Authors: Akkus, Oktay, Cookson, J. Anthony, Hortaçsu, Ali
Format: Article
Language:English
Subjects:
Certification
Consumer attitudes
Equilibrium
initial public offering (IPO) underpricing
matching models
Prestige
Profits
Rents
selection correction
Trading
underwriter reputation
Underwriting
Valuation
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Summary:Using a tractable structural model of the matching equilibrium between underwriters and equity-issuing firms, we study the determinants of value in underwriter–firm relationships. Our estimates imply that high underwriter prestige is associated with 5.3%–14.1% greater equilibrium surplus. According to the structural model, high prestige exhibits a significant certification effect throughout the sample (1985–2010), but there is also a countervailing effect of underwriter prestige that reflects subscriber preferences for more underpricing. Consistent with trading off profits from issuers and subscribers, high-prestige underwriters underprice more in hot markets when rents to catering to subscribers are greatest. This paper was accepted by Gustavo Manso, finance.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2020.3594