Underwriter reputation and the decision to go public

The existing literature on the role of underwriters has concentrated on underwriter certification, monitoring and marketing. However, these studies have apparently ignored the market timing role often ascribed to underwriters by practitioners. This study examines whether IPO timing is a function of the reputation of underwriters who have expertise in the financial market. In their advisory role, underwriters advise their client firms on offer timing, in addition to pricing decisions and, ultimately, distributing the shares to investors. Unlike auditors, lawyers and engineers, who are responsible only for specific elements of registration statements, underwriters are responsible for the timing decision, relying on information from all parties to the offering, knowledge of the issuer's industry performance, and expertise gained in continuous market participation. The more reputable underwriters have a comparative advantage in analyzing financial markets, because of scale economies in information acquisition and in search, than their less reputable counterparts. The more reputable underwriters are able to search more efficiently because of superior expertise in the new issue market gained from extensive experience, and because of a more extensive customer base. Because of the benefits from successful timing and the costs of poor timing advice, underwriters' reputation and, thus, value will depend in part on how well they time IPOs. This paper provides empirical evidence that the more reputable underwriters possess a greater proficiency than their lesser known counterparts, in taking companies public when the market valuation of comparable stocks in the same industry is high.