Reciprocity in Syndicate Participation and Issuer's Welfare: Evidence from Initial Public Offerings*

Abstract

Using 1043 IPOs from January 1997 to June 2002, we examine whether syndicate participation is reciprocal and also whether such reciprocity is beneficial to issuers. Our empirical results show that reciprocal syndicates appear to make a lower level of price revision (lower information production), which lowers the amount of capital to be raised through going public, and that the lead underwriter in the reciprocal syndicate provides less analyst coverage. We interpret the lower price revision level as an intention to exert less marketing effort and such intention is, in part, embodied in the form of less analyst coverage by the lead underwriter in the aftermarket. In addition, in order to reduce underpricing, reciprocal syndicates do not provide greater certification services. In addition, we find that reciprocal syndicates charge higher, or at least not lower, underwriting spreads than non-reciprocal syndicates. Evidence overall shows that reciprocity is less beneficial to issuers but, rather, it appears to be established and maintained for the benefit of underwriters.