Wanna Dance? How Firms and Underwriters Choose Each Other

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 match...

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Bibliographic Details
Published in:The Journal of finance (New York) 2005-10, Vol.60 (5), p.2437-2469
Main Authors: FERNANDO, CHITRU S., GATCHEV, VLADIMIR A., SPINDT, PAUL A.
Format: Article
Language:English
Subjects:
Analytical forecasting
Bank management
Bank operations
Bond issues
Capital formation
Data analysis
Economic models
Economic theory
Empirical research
Enterprises
Fees
Financial economics
Financial management
Financial models
Initial public offering
Initial public offerings
Insurance underwriting
Investment bankers
Investment banking
Market capitalization
Market share
Modeling
Selection
Studies
T tests
Underwriting
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Summary: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.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.2005.00804.x