Do Underwriters Matter? The Impact of the Near Loss of an Equity Underwriter

The financial crisis provides a natural experiment to test theoretical predictions of post-IPO roles for equity underwriters. On the day of their underwriter's near failure, stock prices of clients of Bear Stearns, Lehman, Merrill and Wachovia fell by almost 5%, on average. This decline was more than 1% lower than the conditional return predicted by a market model, a destruction of equity value of more than $3 billion. The price impact was worse for companies with more opaque operations and fewer monitors, suggesting that underwriters play an important role in monitoring newly public companies. There is no evidence that the abnormal price decrease was related to underwriters' role as market maker or lender