The market for certification by external parties: Evidence from underwriting and banking relationships

This paper provides evidence that an underwriter is better able to certify an equity issue if it has a lending relationship with the firm. An announcement of being underwritten by the firm’s lending-relationship bank reduces ex post information asymmetry, thereby improving the announcement return. Further, because this reduction in information asymmetry effectively disseminates what was previously the lending bank’s private information, it decreases its affiliated market maker’s information advantage, thus reducing its contribution to price discovery and liquidity. These results provide evidence on the value of information production and transmission by banks, and more generally on the role of external parties in reducing information asymmetry.