Download or read book Underwriter Reputation and Pricing of Risk written by Chongyang Chen and published by . This book was released on 2016 with total page 1 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 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.