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Wanna Dance? How Firms and Underwriters Choose Each Other





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    • Chitru S. Fernando is at the Michael F. Price College of Business, University of Oklahoma. Vladimir A. Gatchev and Paul A. Spindt are at the A. B. Freeman School of Business, Tulane University. We thank Tim Adam, Rajesh Aggarwal, Vladimir Atanasov, Suman Banerjee, Sugato Bhattacharyya, Tom Chemmanur, Francesca Cornelli, Louis Ederington, Gary Emery, Rick Green, Rob Hansen, Thomas Hellmann, Ravi Jagannathan, Steve Kaplan, Laurie Krigman, Srini Krishnamurthy, Scott Linn, Alexander Ljungqvist, Dennis Logue, Bill Megginson, Tom Noe, Nagpurnanand Prabhala, Jay Ritter, Arturo Rodriguez, Donghang Zhang, two anonymous referees, and seminar participants at the University of Michigan, Tulane University, Texas A&M University, Baruch College, Hong Kong University of Science and Technology, University of New Orleans, Southern Methodist University, Vanderbilt University, the 2002 WFA meetings, the 2002 FMA meetings, the 2004 FIRS Conference on Banking, Insurance and Intermediation, the 2004 EVI Conference, and the 2005 AFA meetings for helpful comments and suggestions. We thank Thompson Financial for providing us with the I/B/E/S analyst data. We are responsible for any remaining errors.


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.