Underwriter reputation and pricing of risk: evidence from seasoned equity offerings

  • Cathy Xuying Cao
  • Chongyang Chen
  • Joyce Qian Wang
Original Research

DOI: 10.1007/s11156-013-0420-6

Cite this article as:
Cao, C.X., Chen, C. & Wang, J.Q. Rev Quant Finan Acc (2015) 44: 609. doi:10.1007/s11156-013-0420-6


This paper investigates how underwriter-issuer matching choices and firm risks affect the cost of equity issuance. We show that underwriter-issuer matching is not random; it reflects underwriter reputation and risk concerns, issuers’ quality, and equity market conditions. We apply Heckman self-selection estimation model to control for the endogenous underwriter-issuer matching. We find that the matching choice leads to considerable heterogeneity in pricing of issuer systematic and firm-specific risks in seasoned equity offering (SEO) underwriting fees. Low-reputation underwriters require compensation for bearing issuer’s systematic risk but not for firm-specific risk, while high-reputation underwriters do the opposite. Moreover, evidence in this paper suggests that the underwriter-issuer matching decision entails a non-linear relation between SEO spread and underwriter reputation: high- and low- reputation underwriters earn higher spreads than medium-reputation underwriters. Our findings highlight the importance of accounting for underwriter-issuer matching in assessing SEO underwriting contracts. The results are robust to alternative underwriter reputation measure, model specifications, sample periods, and different samples of firms.


Seasoned equity offeringInvestment bankUnderwriterReputationRiskGross spread

JEL Classification


Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Cathy Xuying Cao
    • 1
  • Chongyang Chen
    • 2
  • Joyce Qian Wang
    • 3
  1. 1.Albers School of Business and EconomicsSeattle UniversitySeattleUSA
  2. 2.School of ManagementUniversity of Texas at DallasRichardsonUSA
  3. 3.School of Accounting and FinanceKean UniversityUnionUSA