#05-39
Wanna Dance? How Firms and Underwriters Choose Each Other
Chitru S. Fernando, Vladimir A. Gatchev and Paul A. Spindt
Abstract: We develop and test a theory explaining the equilibrium matching of issuers and underwriters.
We assume that issuers and underwriters associate by mutual choice, and that underwriter
ability and issuer quality are complementary. Our model implies that matching is positive
assortative, and that matches are based on firms’ and underwriters’ relative characteristics at
the time of issuance. The model predicts that the market share of top underwriters and their
average issue quality varies inversely with issuance volume. Various cross-sectional patterns in
underwriting spreads are consistent with equilibrium matching. We find strong empirical
confirmation of our theory.
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