Assortative Matching And Reputation In The Market For First Issues

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 prestige is associated with 5.3%-14.1% greater equilibrium surplus. According to the structural model, high prestige exhibits a significant certification effect throughout the sample (1985-2010), but there is also a countervailing effect of underwriter prestige that reflects subscriber preferences for more underpricing. Consistent with trading off profits from issuers and subscribers, high-prestige underwriters underprice more in hotmarkets when rents to catering to subscribers are greatest.