Underwriter Reputation: Certification in Seasoned Equity Issues

Abstract:     
In this paper I examine the relation between certification and the reputation of underwriters. Based on seasoned equity offers between 1976 and 2005, I document a positive abnormal announcement return associated with the selection of an underwriter that is more reputable than expected given publicly available firm and issue characteristics. Having an issue underwritten by a surprisingly more reputable underwriter is associated with a durable decrease in bid-ask spreads lasting about three quarters from the announcement date. This effect and the aforementioned one on announcement returns are both stronger with firms that have higher levels of asymmetric information ahead of the offering. These results are consistent with the quality of the underwriter being directly related to the often mentioned certification effect, consisting of a reduction in information asymmetry.

Keywords: Certification, Securities underwriting, Universal banking

JEL Classification: G24, G28, G32

working papers series