Comovement and Investment Banking Networks Comovement and Investment Banking Networks

Abstract

Abstract We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the role of an investment bank as an information hub for segmented networks of investors, we find that stocks that share the same lead underwriter at their IPOs tend to move together. We also find that this comovement increases around a seasoned equity offering by the firm. Furthermore, firms that switch underwriters between their IPO and a subsequent SEO move less with the old-bank stocks and move more with the new-bank stocks after the switch even after controlling for potential endogeneity issues. The change in comovement is bigger for stocks completing their first SEO and for stocks with a larger change in ownership by institutions associated with the new bank. We thank Alex Butler, Yael Hochberg, Andy Puckett, Zheng Sun, and seminar participants at Rice University, the University of Wisconsin-Madison, the 2011 Western Finance Association meetings, and the 2011 Financial Management Association meetings for useful comments and suggestions. All remaining errors are our own. 1 Comovement and Investment Banking Networks Abstract We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the role of an investment bank as an information hub for segmented networks of investors, we find that stocks that share the same lead underwriter at their IPOs tend to move together. We also find that this comovement increases around a seasoned equity offering by the firm. Furthermore, firms that switch underwriters between their IPO and a subsequent SEO move less with the old-bank stocks and move more with the new-bank stocks after the switch even after controlling for potential endogeneity issues. The change in comovement is bigger for stocks completing their first SEO and for stocks with a larger change in ownership by institutions associated with the new bank.