Investment Banking Networks And Stocks Prices

The registration system reform of China has put forward new requirements for investment banks, since they cannot maintain long-term profit growth only by traditional businesses. Thus, having a clear understanding of the position and influence of investment banks in capital markets is beneficial for future transformation. This paper focuses on the intangible resources of investment banks and tries to explore their network value, giving advice on investment banking transformation and better trading strategies for investors in capital markets.Investment banks serve as information hubs for clients and institutional investors, so this paper first constructs investment banking networks by defining measures for associated firms and associated investors. Then it goes on to study the impact of investment banking networks on asset prices and trading behavior. Furthermore, the relationship between comovement changes and trading behavior is examined.This paper argues that the underwriting process could create a segmented information flow directed at targeted groups of institutional investors who would hold similar stocks and share similar correlated trading patterns. Therefore, a firm’s asset price can be affected through market segmentation.Empirical results support the above mechanism and the key findings are as follows:(1) Asset price significantly comoves with stocks sharing the same underwriter after the firm completes initial public offering(IPO) or seasoned equity offering(SEO). Particularly, for firms who switch underwriters in SEO, their stock prices covary more with new underwriters and less with the old ones. (2) Institutional investors tend to hold portfolios that contain stocks in the same investment banking network. When the firm gains access to a network of institutional investors affiliated with its underwriter through IPO or SEO, its ownership structure will probably change due to increase in total fraction held by associated institutions. And the total number of associated institutions increases as well. (3) Changes in comovement of asset prices are related to changes in ownership of the institutions associated with the lead investment banks.