Study On The Effectiveness Of Underwriter’s Reputation

In Initial public offering market, underwriter plays an important role in information public offering pricing and securities selling, more importantly the significance of underwriter lies in the role of "information producer" and"certifying agency". Due to the influence of asymmetric information, the underwriters must solve the "credibility" problem in the first hand. Reputation mechanism, as an institutional arrangement, can make sure that underwriters will produce accurate information, accordingly solve the "credibility problem".Starting with the forming mechanism, this paper argues that all the parties in the issuance market take the underwriter’s reputation as the incentive and restraining mechanism in the long-run interest pursuing. The equilibrium outcome is affected by the change of underwriter’s reputation. But reputation is not an isolated island in the market, whether it can exert its effectiveness depends on its restraining factors. This paper analyzes three restraining factors which affects the reputation mechanism.In view of theory, if the mechanism above-mentioned is in effect, then there are three kinds of relationship in issuance market of security:First, underwriter’s rank of reputation is positive with the quality of issuing firm, for the sake of reputation capital’s appreciation and future income, the more higher reputation’s rank, the more likely which underwriter underwrite security of high quality firm. Second, underwriter’s rank of reputation is negative with IPO’s under pricing level, because that IPO’s under pricing result from asymmetric information, if underwriter’s reputation can well play the role of signal mechanism underwriter, then underwriter with higher reputation rank can more effectively mitigate asymmetry of information between investor and issuing firm. Third, underwriter’s rank of reputation is positive with underwriting service’s fee, because the fact the market offers much more underwriting fee to underwriters with higher reputation than to those with lower reputation is an important compensation and encouragement for underwriter to build and maintain their reputation, is also an continuous impetus to drive underwriter provide high quality underwriting service.According to the theory mentioned above, this paper empirically analyses underwriter’s reputation in China’s issuance market of security based on the IPO date from 2001-2009, the result of empirical analysis shows that three theoretical relationship all can’t be confirmed by data of China’s issuance market of security. This paper argues that the reputation mechanism is of no effect in China’s security market.At last, this paper discusses the reasons of the reputation mechanism ineffectiveness from following perspectives:market structure, system of property rights and regulation.