The Networking Function of Investment Banks: Evidence from Private Investments in Public Equity

Abstract

We examine investment banks' networking function in capital markets, using a sample of Private Investments in Public Equity (PIPEs). We argue that investment banks develop relationships with investors through repeat dealings, and that such relationships form the basis of their networking function. We find that investment banks, especially those with stronger networking abilities, help issuers attract more investors. Investors are more likely to participate in an issue if they have an existing relationship with the issue's investment bank(s). Correspondingly, an issuer that desires more investors is more likely to hire an investment bank than place the shares directly. We also find that issuers pay higher fees to hire investment banks with stronger networking abilities. Our empirical findings suggest that the networking function of investment banks is important in securities offerings.

Keywords: Investment Bank, Networking Function, Investor Participation, Private Investment in Public Equity, PIPE, Placement Agent, Fees

JEL Classification: G24