Underwriter syndication and corporate governance

Abstract

The main purpose of this paper is to examine underwriters' response to issuers' ineffective corporate governance. Given the growing importance of corporate governance for the success of equity offerings, we examine this response using a sample of seasoned equity offerings (SEOs). Previous studies suggest various rationales behind underwriter syndication, such as risk sharing, market-making, information production, certification, and monitoring. We offer an information-asymmetry-reduction hypothesis for the persistence of underwriter syndication. We argue that less effective corporate governance decreases information credibility, which, in turn, increases information asymmetry, leading underwriters to increase syndicate size to mitigate subsequent agency problems. Consistent with this prediction, we find that the size of the underwriter syndication is inversely related to proxies that measure the effectiveness of corporate governance. Results remain robust even after controlling for other confounding factors.

A Temporal Analysis of Expectation Management: Evidence from Public Management Earnings Forecasts

“…Underwriting syndicate has become larger and larger over time. Creating more analyst coverage is one of the primary reasons for using more co-underwriters for equity offerings (Jo, et al, 2012;Corwin and Shultz, 2005). Figure 3 shows the temporal changes in the average number of underwriters in IPOs and SEOs for our sample firms.…”

“…Using archival approach, Feng and McVay (2010) show that analysts have the incentives to curry favor with management and obtain underwriting business by overweighting management guidance. Given the increase in the size of underwriting syndicate, the increased number of analysts who are willing to converge to management forecasts at the expense of their own forecast accuracy may be due to the increased number of affiliated analysts with stronger incentives to please the management (Jo, Kim, and Shin, 2012;Corwin and Schutlz, 2005).…”