The Impact of Clients' Alleged Financial Reporting Fraud on Underwriter Reputation

Wharton Financial Institutions Center Working Paper No. 04-16

43 Pages Posted: 2 Oct 2004

See all articles by Wei-Ling Song

Wei-Ling Song

Louisiana State University

Hatice Uzun

Long Island University

Date Written: 2004

Abstract

This paper examines underwriter reputation loss by using a sample of investment banks that have served corporate clients prior to the discovery of clients' alleged financial reporting fraud. The results indicate that underwriters lose reputation upon the filing of lawsuits against their clients. The magnitude of reputation loss is greater for clients causing larger recent dollar losses to investors, hiding misdemeanors longer, and for the IPO clients with larger weights in the underwriters' portfolios. As the number of clients being sued increases, an underwriter loses credibilty in certification, and the market penalizes the underwriter more severely. However, underwriters can avoid severe market discipline by diversifying their underwriting activities. Besides, we find little evidence that the market disciplines entrant commercial banks as underwriters who also diversify across traditional banking business.

Keywords: Underwriter reputation, market discipline, investment banking, securities fraud

JEL Classification: G21, G24, G28, K22, L14

Suggested Citation

Song, Wei-Ling and Uzun, Hatice, The Impact of Clients' Alleged Financial Reporting Fraud on Underwriter Reputation (2004). Wharton Financial Institutions Center Working Paper No. 04-16, Available at SSRN: https://ssrn.com/abstract=597882 or http://dx.doi.org/10.2139/ssrn.597882

Wei-Ling Song (Contact Author)

Louisiana State University ( email )

Baton Rouge, LA 70803
United States
225-578-6258 (Phone)
225-578-6366 (Fax)

Hatice Uzun

Long Island University ( email )

1 University Plaza
Brooklyn, NY 11201-6572
United States

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