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 Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

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: Deep inside Galaxy M87

The nearby, giant radio galaxy M87 hosts a supermassive black hole (BH) and is well-known for its bright jet dominating the spectrum over ten orders of magnitude in frequency. Due to its proximity, jet prominence, and the large black hole mass, M87 is the best laboratory for investigating the formation, acceleration, and collimation of relativistic jets. A research team led by Silke Britzen from the Max Planck Institute for Radio Astronomy in Bonn, Germany, has found strong indication for turbulent processes connecting the accretion disk and the jet of that galaxy providing insights into the longstanding problem of the origin of astrophysical jets.

Supermassive black holes form some of the most enigmatic phenomena in astrophysics. Their enormous energy output is supposed to be generated by the...

Im Focus: A Quantum Low Pass for Photons

Physicists in Garching observe novel quantum effect that limits the number of emitted photons.

The probability to find a certain number of photons inside a laser pulse usually corresponds to a classical distribution of independent events, the so-called...

Im Focus: Microprocessors based on a layer of just three atoms

Microprocessors based on atomically thin materials hold the promise of the evolution of traditional processors as well as new applications in the field of flexible electronics. Now, a TU Wien research team led by Thomas Müller has made a breakthrough in this field as part of an ongoing research project.

Two-dimensional materials, or 2D materials for short, are extremely versatile, although – or often more precisely because – they are made up of just one or a...

Im Focus: Quantum-physical Model System

Computer-assisted methods aid Heidelberg physicists in reproducing experiment with ultracold atoms

Two researchers at Heidelberg University have developed a model system that enables a better understanding of the processes in a quantum-physical experiment...

Im Focus: Glacier bacteria’s contribution to carbon cycling

Glaciers might seem rather inhospitable environments. However, they are home to a diverse and vibrant microbial community. It’s becoming increasingly clear that they play a bigger role in the carbon cycle than previously thought.

A new study, now published in the journal Nature Geoscience, shows how microbial communities in melting glaciers contribute to the Earth’s carbon cycle, a...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Expert meeting “Health Business Connect” will connect international medical technology companies

20.04.2017 | Event News

Wenn der Computer das Gehirn austrickst

18.04.2017 | Event News

7th International Conference on Crystalline Silicon Photovoltaics in Freiburg on April 3-5, 2017

03.04.2017 | Event News

 
Latest News

New quantum liquid crystals may play role in future of computers

21.04.2017 | Physics and Astronomy

A promising target for kidney fibrosis

21.04.2017 | Health and Medicine

Light rays from a supernova bent by the curvature of space-time around a galaxy

21.04.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>