284 B.E. Eckbo et al.
and market making ability being moderately important and underwriting fees being the
least important attribute. This ranking suggests that competition over underwriting fees
is unlikely to have much explanatory power empirically.Mola and Loughran (2004)
estimates the determinants of SEO underwriter market share and finds that a highly re-
garded analyst team increases the underwriter market share by 1.5 percent, adjusting for
other factors (see theirTable 5).
Ellis, Michaely, and O’Hara (2000)report that lead underwriters are initially the most
active market maker in IPO stocks.Ellis, Michaely, and O’Hara (2004)find that the eco-
nomic significance of lead underwriter market making declines as IPO stocks become
seasoned over the following year.Corwin and Schultz (2005)show that number of mar-
ket makers and analysts that are covering a stock rise with syndicate size. This suggests
that the quality of underwriter market making and analyst coverage are likely to be less
important to larger issuers, who benefit from greater investor interest. Consistent with
this,Altinkilic (2006)reports that the market making component in SEO underwriting
spreads is lower for larger firms.
Ljungqvist et al. (2004)document that analysts’ recommendations relative to the con-
sensus are positively associated with investment banking relationships and brokerage
pressure, but negatively associated with the presence of institutional investors in the
firm being followed. The latter result is especially strong when there are more institu-
tions holding larger blocks in the firm, and for firms whose institutional holdings are
concentrated in the hands of the largest institutional investors. They conclude that pres-
ence of institutional investors (who are primary customers of the analysts’ services)
provides an incentive mechanism for the analysts not to succumb to pressure to pro-
vide favorable opinions on their employers’ investment banking clients and to boost
brokerage business.Ljungqvist, Marston, and Wilhelm (2006)find optimistic analyst
reports don’t help underwriters win SEO assignments. Instead, they find that analysts’
reputation, lending relationships and bond underwriting increase the bank’s chances of
winning underwriting assignments.
Ellis, Michaely, and O’Hara (2004)report that underwriters with continuing issuer
relationships tend to charge lower fees, have optimistic analyst forecasts and are active
in writing analyst reports. Banks competing for new SEO assignments often take ac-
tions in advance of an underwriting assignment: add analyst coverage, make optimistic
analyst forecasts, do not compete on fees and do not become more active in market
making services. Banks gaining new SEO assignments move quickly to: add analyst
coverage, issue optimistic forecasts and increase their market making presence. Banks
facing a weakened or terminated issuer relationship tend to reduce their analyst cov-
erage, eliminate the positive bias in analyst forecasts, but do not reduce their market
making services. They conclude that investment banks compete for follow-on equity
offering underwriting business along multiple-dimensions (such as fees, underpricing
discount, analyst coverage, market making, debt relationship, and overall reputation),
and that underwriters who deliver on all these dimensions are retained by firms, and can
be viewed as providing superior overall service to the issuer.