This paper will try to elaborate on the different and sometimes mixed empirical results, testing the relationship between underwriter’s reputation and the price of the capital issue. Firstly, the two most cited and used ways of measuring reputation will be explained. Secondly, the relationship between reputation and issue pricing will be analysed from different perspectives. Thirdly, the existence of a relationship between reputation and fees as well as between reputation and proceeds will be proven. After that commercial and investment banks as underwriters will be compared and it will be shown that there are reasons to choose a commercial bank as an underwriter. Finally, the mechanics of how underwriters are being chosen and the reasons for switching underwriters will be analysed, before ending this study with a conclusion.
Table of Contents
1. Introduction
2. How Reputation is Measured
2.1 Tombstone Announcement Measure
2.2 Market Share Measure
3. The Relationship between Underwriter Reputation and Issue Pricing
3.1 Overpricing, Underpricing and Asymmetric Information
3.2 The Underpricing Equilibrium
3.3 Price Support
4. Fees and Proceeds
4.1 Fees
4.2 Proceeds
5. Commercial vs. Investment Banks
6. How Are Underwriters Being Chosen and Why Do Companies Switch Underwriters?
7. Conclusion
8. List of References
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