Relationship-Specific Assets and the Pricing of Underwriter Services

Christopher M. James

218 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Credit Risk and Financial Regulations

Abstract

ABSTRACT This paper investigates the effect of setup costs on the pricing of investment banking services. The existence of setup costs is predicted to result in lower underwriter spreads in IPOs for firms that are expected to issue again. Consistent with this prediction, I find significantly lower spreads for firms that make subsequent issues. I also find that a firm's likelihood of changing underwriters in a subsequent offer is related to the time between offerings and the underwriter's pricing performance in the IPO. These results suggest that the deviations from optimal IPO pricing carry a penalty for the underwriter.

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References

1979Transaction-Cost Economics: The Governance of Contractual Relations 1978Vertical Integration, Appropriable Rents, and the Competitive Contracting Process 1992Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt 1986Investment banking, reputation, and the underpricing of initial public offerings 1990Initial Public Offerings and Underwriter Reputation 1990Asymmetric Information, Bank Lending and Implicit Contracts: A Stylized Model of Customer Relationships 1989How investment bankers determine the offer price and allocation of new issues 1981Auditor independence, ‘low balling’, and disclosure regulation

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1999Bank entry, competition, and the market for corporate securities underwriting 2005Do Bank Relationships Affect the Firm's Underwriter Choice in the Corporate‐Bond Underwriting Market?2007Second time lucky? Withdrawn IPOs that return to the market 2012The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers 1995Chapter 30 Initial public offerings

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