Underwriter certification: The private information content of reputation and lending relationships

This dissertation examines the relation between certification and two attributes of potential underwriters: their reputations and their lending relationships. Based on seasoned equity offers between 1976 and 2005, in Chapter 2 of this dissertation I document a positive abnormal announcement return associated with the selection of an underwriter that is more reputable than expected given publicly available firm and issue characteristics. Having an issue underwritten by a surprisingly more reputable underwriter is associated with a durable decrease in bid-ask spreads lasting about six months from the announcement date. This effect and the aforementioned one on announcement returns are both stronger with firms that have higher levels of asymmetric information ahead of the offering. These results are consistent with the quality of the underwriter being directly related to the often mentioned certification effect, consisting of a reduction in information asymmetry.In Chapter 3 of this dissertation, I provide evidence that following deregulation allowing for private information transfers within banks, an underwriter is better able to certify a seasoned equity issue if it has a lending relationship with the firm. An unexpected announcement of being underwritten by the firm's lending-relationship bank reduces ex-post information asymmetry and improves the announcement return. Consistent with this enhanced certification effect, firms reveal a preference for lending relationship banks as underwriters. In turn, these banks select which firms to underwrite based on their private information about the firm and strategically set lower fees the more favorable that information is. Also consistent with their higher certification ability, lending relationships are associated with a fee premium after controlling for the effect of private information on the firm-underwriter match. Overall, these results add support to the value of banks in the production and transmission of information.