| In the capital market, investment banks play a significant role as intermediaries in eliminating information asymmetry and improve market efficiency. The reputation of investment banks, which is established with long-term performance as a repeated player, does matter for the future sustainable profit. Two reasons count for it. Firstly, as explained by the signaling theory, IPO firms tend to hire prestigious underwriters in order to convince the investors of conveyed information, by which to eliminate uncertainties and improve price. Secondly, prestigious underwriters would protect their reputation by monitoring and certifying financial information of IPO firms, thereby restricting any earnings manipulation. As a result, IPO firms associated with prestigious underwriters tend to exhibit less possibility of earnings management and false information.The past twenty years has seen the rapid development and several periods of revolution of Chinese capital market. As the transition of policy-oriented to market-driven system, the emphasis has been placed on the role of underwriters in clarifying quality of IPO firms. The CSRC launched self-supervisory of financial information for IPO firms, which offers us a valuable sample to examine the relationship between IPO firms quality and underwriters reputation in China.This study confirms the reputation theory of underwriters in Chinese market. Firstly, we find strong evidence of negative relationship between delisting and underwriters reputation. To be specific, IPO firms underwritten by prestigious underwriters tend to have more confidence in their financial information and file the self-supervisory report. Secondly, further evidence shows that underwriters’ reputation plays a significant role in restricting earning manipulation of IPO firms. This study contributes to the current literature on the validity of reputation system of underwriters in Chinese market and provides a good theoretical foundation for future market-driven revolution. |
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