Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Stock prices of companies that use the same underwriter tend to move together

08.08.2014

The stock prices of companies that use the same lead underwriter during their equity offerings tend to move together, according to a new study by financial economics experts at Rice University and the University of Alabama.

“We tested the hypothesis that investment banking networks affect stock prices and trading behavior,” said James Weston, a professor of finance at Rice’s Jones Graduate School of Business. “Consistent with the notion that investment banks such as Goldman Sachs and Merrill Lynch serve as information hubs for segmented groups of investors, the stock prices of companies that use the same lead underwriter during their equity offerings tend to move together.”


An equity offering is an invitation by an underwriter to the general public or a select group of investors to buy a new issue of a company’s common stock.

Weston said the magnitude of the effect is similar to the “co-movement” that research has linked to share price, stock index inclusion, specific industry or geography. He co-authored the paper with Jones School colleague Gustavo Grullon, a professor of finance, and Shane Underwood, an associate professor of finance at the University of Alabama’s Culverhouse College of Commerce. It was published in the July issue of the Journal of Financial Economics.

The authors provided an example to illustrate their findings: “Goldman Sachs underwrites equity offerings by firms A, B and C. In its road show, it conveys information about the firms to a set of investors, IGoldman, who subsequently buy shares in A, B and C. JPMorgan similarly underwrites offerings by a different set of firms (D, E and F) and markets them to a different set of investors, IMorgan.” Weston said as long as these two sets of investors do not share any information about firm fundamentals, the trading behavior of these two separate sets of investors can lead to correlations in asset prices that are driven by correlated buying and selling pressure within the investor set.

The authors also found that when firms switch underwriters between their initial public offering (IPO) and a seasoned equity offering (SEO), they co-move less with the stocks associated with the old bank and more with the stocks associated with the new bank. “This change in co-movement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership,” Weston said.

The authors illustrated this phenomenon using their initial example. “Now suppose an exogenous force causes firm F to switch underwriters for its next security offering, and it moves from JPMorgan to Goldman,” they wrote. “Now, IGoldman obtains better information about firm F than IMorgan, which causes the stock returns of firm F to move less with D and E (its old network) and more with A, B and C (its new network).”

The authors said their results are likely driven by the existence of distinct clienteles or networks of segmented investors created by privileged information flow between the investment bank and investors. “While it has long been noted that investment banking relations can create such information channels, we present new evidence that this has an effect on asset prices and trading behavior through co-movement,” they said. In other words, companies are not just hiring an investment bank; they are hiring for future performance.

“In general, the results in this paper highlight the importance of investor networks on asset prices, and they underscore the effect of networks on the institutional investors’ demand for stocks,” the authors wrote.

To arrive at their findings, the authors created two samples of all equity offerings between 1980 and 2008 from the Securities Data Corporation Platinum database. The first sample consisted of 2,540 IPOs in which a firm uses a single lead underwriter. The second sample contained 2,869 SEOs in which a single underwriter leads both the SEO and the previous equity offering. Among the sample of SEOs, 1,511 used the same bank from the previous offering and 1,358 switched investment banks.

For a copy of the study, “Co-movement and Investment Banking Networks,” e-mail jfalk@rice.edu.

Follow Rice News and Media Relations via Twitter @RiceUNews.

Related materials:

Grullon bio: http://business.rice.edu/Gustavo_Grullon.

Weston bio: http://business.rice.edu/James_Weston.

Located on a 300-acre forested campus in Houston, Rice University is consistently ranked among the nation’s top 20 universities by U.S. News & World Report. Rice has highly respected schools of Architecture, Business, Continuing Studies, Engineering, Humanities, Music, Natural Sciences and Social Sciences and is home to the Baker Institute for Public Policy. With 3,920 undergraduates and 2,567 graduate students, Rice’s undergraduate student-to-faculty ratio is just over 6-to-1. Its residential college system builds close-knit communities and lifelong friendships, just one reason why Rice has been ranked No. 1 for best quality of life multiple times by the Princeton Review and No. 2 for “best value” among private universities by Kiplinger’s Personal Finance. To read “What they’re saying about Rice,” go here.

David Ruth | Eurek Alert!
Further information:
http://news.rice.edu/2014/08/07/rice-u-study-stock-prices-of-companies-that-use-the-same-underwriter-tend-to-move-together/

Further reports about: findings initial materials networks stock prices stocks universities

More articles from Business and Finance:

nachricht Is there a bubble in the art market?
07.01.2016 | Universität Luxemburg - Université du Luxembourg

nachricht Finance: Belief in higher returns from private equity may be misplaced
13.10.2015 | Universität Luxemburg - Université du Luxembourg

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: The most accurate optical single-ion clock worldwide

Atomic clock experts from the Physikalisch-Technische Bundesanstalt (PTB) are the first research group in the world to have built an optical single-ion clock which attains an accuracy which had only been predicted theoretically so far. Their optical ytterbium clock achieved a relative systematic measurement uncertainty of 3 E-18. The results have been published in the current issue of the scientific journal "Physical Review Letters".

Atomic clock experts from the Physikalisch-Technische Bundesanstalt (PTB) are the first research group in the world to have built an optical single-ion clock...

Im Focus: Goodbye ground control: autonomous nanosatellites

The University of Würzburg has two new space projects in the pipeline which are concerned with the observation of planets and autonomous fault correction aboard satellites. The German Federal Ministry of Economic Affairs and Energy funds the projects with around 1.6 million euros.

Detecting tornadoes that sweep across Mars. Discovering meteors that fall to Earth. Investigating strange lightning that flashes from Earth's atmosphere into...

Im Focus: Flow phenomena on solid surfaces: Physicists highlight key role played by boundary layer velocity

Physicists from Saarland University and the ESPCI in Paris have shown how liquids on solid surfaces can be made to slide over the surface a bit like a bobsleigh on ice. The key is to apply a coating at the boundary between the liquid and the surface that induces the liquid to slip. This results in an increase in the average flow velocity of the liquid and its throughput. This was demonstrated by studying the behaviour of droplets on surfaces with different coatings as they evolved into the equilibrium state. The results could prove useful in optimizing industrial processes, such as the extrusion of plastics.

The study has been published in the respected academic journal PNAS (Proceedings of the National Academy of Sciences of the United States of America).

Im Focus: New study: How stable is the West Antarctic Ice Sheet?

Exceeding critical temperature limits in the Southern Ocean may cause the collapse of ice sheets and a sharp rise in sea levels

A future warming of the Southern Ocean caused by rising greenhouse gas concentrations in the atmosphere may severely disrupt the stability of the West...

Im Focus: Superconductivity: footballs with no resistance

Indications of light-induced lossless electricity transmission in fullerenes contribute to the search for superconducting materials for practical applications.

Superconductors have long been confined to niche applications, due to the fact that the highest temperature at which even the best of these materials becomes...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Travel grants available: Meet the world’s most proficient mathematicians and computer scientists

09.02.2016 | Event News

AKL’16: Experience Laser Technology Live in Europe´s Largest Laser Application Center!

02.02.2016 | Event News

From intelligent knee braces to anti-theft backpacks

26.01.2016 | Event News

 
Latest News

About injured hearts that grow back - Heart regeneration mechanism in zebrafish revealed

10.02.2016 | Life Sciences

The most accurate optical single-ion clock worldwide

10.02.2016 | Earth Sciences

Absorbing acoustics with soundless spirals

10.02.2016 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>