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THE ROLE OF INVESTMENT BANK REPUTATION AND RELATIONSHIPS IN EQUITY PRIVATE PLACEMENTS

Authors


  • We thank the editor (Jayant Kale) and the anonymous referee for their valuable comments during the review process. We are also thankful for helpful comments from Dhaval Dave, Lee Gagan, Atul Gupta, Murali Jagannathan, Sudarshan Jayaraman, Srini Krishnamurthy, Husayn Shahrur, Lakshmanan Shivakumar, Eli Talmor, Ane Tamayo, Oktay Urcan, Florin Vasvari, Chip Wiggins, and seminar participants at Bentley University, London Business School, and 2008 Financial Management Association meetings. We are solely responsible for any errors.

Abstract

We explore the role of placement agents in equity private placements. Reputable agents are more likely to place shares of firms that have performed better and that have had frequent prior relationships with the agent. Controlling for self-selection and endogeneity, firms using reputable agents offer smaller price discounts. However, issuers having frequent prior relationships with placement agents incur higher gross spreads. Although the results support the certification role of investment banks in private placements, they also shed light on the costs incurred by issuers that frequently rely on the same investment bank.

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