Underwriter Networks, Information Asymmetry, and Seasoned Equity Offerings

Abstract

Using various “centrality” measures from Social Network Analysis (SNA), we analyze, for the first time in the literature, how the location of a lead underwriter in its network of investment banks affects various aspects of seasoned equity offerings (SEOs). We hypothesize that investment banking networks perform an important economic role in the underwriting process for SEOs, namely, that of information dissemination, where the lead underwriter uses its investment banking network to disseminate information about the SEO firm to institutional investors. Consistent with the above information dissemination role, we show that SEOs with more central lead SEO underwriters are associated with a smaller extent of information asymmetry in the equity market. We then develop testable hypotheses based on the information dissemination role of underwriter networks for the relationship between SEO underwriter centrality and various SEO characteristics, which we test in our empirical analysis. Consistent with the above hypotheses, we find that SEOs with more central lead underwriters are associated with less negative announcement effects; smaller offer price revisions; smaller SEO discounts and underpricing; higher immediate post-SEO equity valuations; and greater post-SEO long-run stock returns. We also find that SEOs with more central lead underwriters are associated with greater institutional investor participation. Our instrumental variable (IV) analysis using the industry-average bargaining power of underwriters relative to issuers as the instrument show that the above results are causal. Consistent with greater value creation by more central lead underwriters, we find that more central lead underwriters receive greater compensation as a fraction of total SEO proceeds.

Keywords: Seasoned Equity Offerings, Equity Issues, Announcement Effect, Information Asymmetry, Investment Banking Networks

JEL Classification: G24, G32