Assortative Matching and Reputation in the Market for First Issues

Abstract

Using a tractable structural model of the matching equilibrium between underwriters and equity issuing firms, we study the determinants of value in underwriter-firm relationships. Our estimates imply that high underwriter reputation is associated with 10% to 15% greater long run market value for the issuing firm. Using the structural model, we quantify two distinct effects of underwriter reputation: (i) an issuer-side certification effect where greater reputation decreases underpricing, which has been stable and negative since 1985, and (ii) a subscriber-side clientele effect where high prestige underwriters utilize greater underpricing to reward investment clients, which became significantly positive only after 1990.

Keywords: two-sided matching, structural estimation, market for first issues

JEL Classification: G24, C34, C78