Law Firm Prestige and Performance in IPOs: Underwriters' Counsel as Gatekeeper or Turnstile
Royce De Rohan Barondes
University of Missouri-Columbia School of Law
Florida State University
Gary C. Sanger
Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration
CORI Working Paper No. 03-08
We investigate the relationship between pricing in an initial public offering (IPO) and the prestige of the participating underwriters' law firm. We hypothesize law firm quality affects how law firms perform their obligations in IPOs - more prestigious law firms acting more independently. Consistent with this hypothesis, controlling for endogeneity of choice of underwriters' counsel, we find a negative relationship between pre-IPO price adjustment and the participation of prestigious underwriters' counsel. We also find a negative relationship between the participation of prestigious underwriters' counsel and initial return, which is consistent with market trading reflecting the decreased risk associated with offerings involving prestigious underwriters' counsel. Lastly, we find certain observable characteristics indicating diminished likelihood of undisclosed negative information (venture backing and quality of the issuer's counsel) are associated with an increased likelihood use of prestigious underwriters' counsel.
Keywords: Initial public offerings, law firm prestige, underwriting
JEL Classification: G24, K22
Date posted: February 5, 2004
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