Investment Banker Reputation and the Performance of Seasoned Equity Issuers

Abstract

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Underwriter choice and earnings management: evidence from seasoned equity offerings

“…8 Even though SEO firms are not likely to suffer information asymmetries to the same extent as IPO firms, there are still information asymmetries regarding the expected future performance between the firms' insiders and potential investors in SEOs. In addition, prior literature reports that SEO firms in the 1990s faced greater uncertainty due to an increased proportion of riskier offerings, such as NASDAQ and technology issues in the 1990s (McLaughlin et al, 2000;Corwin, 2003;Mola & Loughran, 2004). Based on this literature, we argue that there exists an information asymmetry between issuing firms and investors that can cause a temporal overvaluation of seasoned equity offers.…”

“…Second, previous literature suggests that underwriters help reduce information asymmetry through certification in the United States (Booth & Smith, 1986;Beatty & Ritter, 1986;Chemmanur & Fulghieri, 1994;Ng & Smith, 1996;Puri, 1996;Dunbar, 2000;McLaughlin et al, 2000), the United Kingdom (Slovin, Sushka, & Lai, 2000), and Japan (Cooney, Kato, & Schallheim, 2003). 7 McLaughlin et al (2000 suggest that hiring a low-quality underwriter is a bad signal to the market.…”

“…Chemmanur and Fulghieri (1994) and McLaughlin et al (2000) claim that highquality underwriters can produce superior information about the firms they underwrite and have more stringent standards for certifying the issuing-firm's value. In summary, we expect issuers with minimal incentives for earnings management to select high-quality underwriters to enhance underwriter certification, thereby signaling favorable information to the marketplace.…”

“…6 Carter and Manaster (1990) examine the relation between underwriter quality and long-term IPO performance. McLaughlin, Safieddine, and Vasudevan (2000) show that the market impounds the value of the underwriters' information and certification at the announcement of SEOs. However, these studies differ from ours in that they just examine the relation between underwriter quality and long-run market performance, without controlling potential earnings management effects.…”

Role Of Underwriters In Restraining Earnings Management In Initial Public Offerings

“…Previous research shows that prestigious underwriters are more effective in mitigating the adverse impact of information asymmetry in the equity market, resulting in better post-issue stock price performance for high quality IPO issuers (Chemmanur and Fulghieri, 1994;Carter et al, 1998;McLaughlin et al, 2000). From the issuer's perspective, McLaughlin et al (2000) suggest that hiring a less reputable underwriter conveys a bad signal to the market that is associated with greater underpricing. As such, quality IPO issuers with less incentive for earnings management select prestigious underwriters to convey a favorable signal to the market.…”