Innovation and First-Mover Advantages in Corporate Underwriting: Evidence from Equity Linked Securities

Abstract

Investment banks develop new securities permanently even when their competitors can imitate them almost immediately and at significantly smaller development costs. Using data of all the new issues of Equity Linked and Derivative Securities since 1985 compiled by SDC, and firm financial data from COMPUSTAT, I test if innovators have a demand advantage over the imitators when they compete to underwrite new issues using innovative corporate products. If the innovator has private information about the innovation, his own variety of the security may be better valued than the imitators’ varieties by the issuers. I estimate the issuers’ demand for the banker’s underwriting service across different varieties of equity-linked securities. Using a nested-logit model of discrete choice I find that, ceteris paribus, the demand for innovators’ varieties is larger than for imitators’. I also find that this demand advantage is decreasing in time, suggesting that imitators learn from observing deals made in the past by the innovator and by themselves. The initial innovator’s advantage is larger for securities that appear later in a sequence of innovations but it diminishes faster.Financial Innovation; Investment Banking; Underwriting; First-Mover Advanatges; Demand Estimation