Investment Banker Reputation and the Performance of Seasoned Equity Issuers

Financial Management (Financial Management Association), Spring, 2000 by Robyn McLaughlin, Assem Safieddine, Gopala K. Vasudevan

In contrast to the univariate results in Panel A, Table III, the regression estimates in Table IV for announcement-period CPEs show a significant effect for banker prestige. The market reacts more positively to announcements of SEOs conducted by high-prestige investment bankers. After controlling for firm size, growth opportunities and other factors the coefficient of the high-prestige investment banker dummy is positive (0.015) and significant at the 0.05 level. This result is shown in the first column of Table IV. The second column in Table IV shows results measuring the combined effects of high information asymmetry and banker prestige. Again, the coefficient for firms using a high-prestige banker, 0.026, is significant at the 0.05 level.

Also significant (at the 0.05 level) are the interactive dummy variable coefficients for high-prestige banker and above-median market-to-book ratio (coefficient of -0.025) and for high-prestige banker and above-median fees (coefficient of 0.030). Thus, issuers with high information asymmetry give back almost all of the benefit of being underwritten by a high-prestige banker.

However, if issuing firms are also paying above median fees, the benefit is restored (summing the coefficients, 0.026 - 0.025 0.030 = 0.031). Thus, we show that high-information asymmetry issuers that are willing to pay higher fees benefit from being represented by a high-prestige banker. These results provide strong support for an important information role for investment bankers in SEOs, particularly when the level of information asymmetry is high for the issuing firm.

In the third and fourth columns of Table IV, we report regression results for the post-issue portfolio-adjusted holding-period returns. In both regressions, the coefficients of the pre-issue stock price run-up variable are negative, -0.073 and -0.070, and significant at the 0.05 level. This is consistent with results from previous studies. Firms that show larger increases in stock price before the issue also have larger declines in the long-run post-issue period.

For long-run returns in Table IV, the coefficients for the investment banker prestige variable and the interactive dummy variables are not significant at customary levels. Thus, the announcement-period results show that banker prestige plays an important information role in SEOs. The long-run holding-period results indicate that the certification role of investment bankers is fully incorporated into the stock price when the SEO is announced.

After we control for the effects of firm size and other factors, the regression estimates in Table IV provide support for an important information/certification role for investment bankers. However, certification might be even more important when it is unexpected. In the next section, we discuss this possibility.

B. Post-SEO Issuer Performance, Banker Prestige, and Estimated Choice Probabilities

In this section, we estimate an empirical model to predict the probability that an issuing firm will use a high-prestige investment banker. We then use the predicted probabilities to identify issuers that have gone against type by unexpectedly using a high-prestige investment banker. We expect that banker prestige will have its greatest effect among these firms.