Underwriters influence stock prices

Researchers found that underwriters influence stock prices. Companies that use the same lead underwriter tend to have stock prices that move in unison, a team from the University of Alabama and Rice University reported. In merchant banking, an underwriter guarantees a specific price for a number of securities to the entity issuing the security (for a fee).

The study, titled “Co-movement and investment banking networks,” written by Gustavo Grullon, Shane Underwood and James P. Weston, has been published in the Journal of Financial Economics.

Professor James Weston, who works at Rice’s Jones Graduate School of Business, said:

“We tested the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the notion that investment banks such as Goldman Sachs and Merrill Lynch serve as information hubs for segmented groups of investors, the stock prices of companies that use the same lead underwriter during their equity offerings tend to move together.”


An equity offering is an underwriter’s invitation to members of the general public or a select group of investors to purchase a new issue of a firm’s common stock.

According to Weston, the impact of a lead underwiter is similar to the “co-movement” that research identified in specific industries or geographical areas.

Example to illustrate their findings

  • Goldman Sachs offering: the underwriter offers equity of companies A, B and C. In its road show, the underwriter conveys data about the firms to a set of investors called I Goldman, i.e. I Goldman investors buy shares in firms A, B and C.
  • JPMorgan offering: this underwriter does the same, but for a different set of firms, called D, E and F, and markets their shares to a different set of investors, called I Morgan.

According to the authors, as long as I Goldman and I JPMorgan do not share data about firm fundamentals, the trading behavior of these two different groups of investors can lead to correlations in share prices that are driven by correlated trading pressure within the investor set.

The research team

The research team.

When switching underwriters, co-movements also shift

When companies switch underwriters between their IPO (initial public offering) and an SEO (seasoned equity offering), their co-movement of stocks is more associated with the new bank rather than the old one (bank, in this context = underwriter).

Weston said:

“This change in co-movement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership.”

The research team illustrate this phenomenon using their initial example. They write:

“Now suppose an exogenous force causes firm F to switch underwriters for its next security offering, and it moves from JPMorgan to Goldman. Now, I Goldman obtains better information about firm F than I Morgan, which causes the stock returns of firm F to move less with D and E (its old network) and more with A, B and C (its new network).”

They believe their findings are probably driven by the existence of distinct clienteles or networks of segmented investors created by privileged data flow between the underwriter and investors.

Firms hire an underwriter along with future performance

They wrote:

“While it has long been noted that investment banking relations can create such information channels, we present new evidence that this has an effect on asset prices and trading behavior through co-movement.”

In other words, firms are not just hiring an underwriter but also future performance.

The team said:

“In general, the results in this paper highlight the importance of investor networks on asset prices, and they underscore the effect of networks on the institutional investors’ demand for stocks.”