The Role of Investment Bank Reputation and Relationships in Equity Private Placements

Abstract

We explore the role of placement agents in equity private placements. Reputable agents are more likely to place shares of firms that have performed better and that have had frequent prior relationships with the agent. Controlling for self-selection and endogeneity, firms using reputable agents offer smaller price discounts. However, issuers having frequent prior relationships with placement agents incur higher gross spreads. While the results support the certification role of investment banks in private placements, they also shed light on the costs incurred by issuers that frequently rely on the same investment bank.

Keywords: Information, reputation, relationships, investment bank, private placement

JEL Classification: G14, G24, G32