Elite Law Firms in the IPO Market
61 Pages Posted: 19 Jul 2017 Last revised: 16 Nov 2018
Date Written: October 2018
IPOs with underwriters that retain an elite law ﬁrm exhibit a lower average ﬁrst-day return. This pattern cannot be explained by proxies associated with existing theories of IPO initial returns. We rationalize this ﬁnding with a pre-IPO pricing model, in which underwriters convey their lack of conﬂicts of interest to the issuer by engaging an elite law ﬁrm. Consistent with the model’s predictions, we ﬁnd a lower incidence of elite law ﬁrm involvement and a larger diﬀerence in average ﬁrst-day return associated with elite law ﬁrms during the dot-com period. We document similar ﬁndings with respect to the dispersion of IPO ﬁrst-day returns and a pattern in the issuers’ re-hiring decision of investment banks consistent with our theory.
Keywords: Certiﬁcation; Conﬂicts of Interest; Underwriter; Legal Counsel
JEL Classification: G24; G32
Suggested Citation: Suggested Citation