UNDERWRITING SPREADS AND REPUTATIONAL CAPITAL: AN ANALYSIS OF NEW CORPORATE SECURITIES

When entering a new security market, investment banks must establish their reputation. This is done through direct experience in the security market or through reputational capital established in existing security markets. I examine the effects of underwriters' market reputation in publicly underwritten offerings in forty-three financial innovations and find more significant entry barriers for less prestigious underwriters. An analysis of underwriting spreads reveals first-issue pricing advantages due to reputational capital. Unlike the more prestigious underwriters, the less prestigious underwriters reduce spreads upon first entry into each new security market to overcome their lack of market reputation.