Do underwriters matter? The impact of the near failure of an equity underwriter

The financial crisis provides a natural experiment for testing theoretical predictions of the equity underwriter's role following an initial public offering. Clients of Bear Stearns, Lehman Brothers, Merrill Lynch, and Wachovia saw their stock prices fall almost 5%, on average, on the day it appeared that these institutions might collapse. The decline was more than 1% lower than the abnormal return of other newly public companies, representing a loss in equity value of almost $3 billion. The price impact was worse for companies with fewer monitors, suggesting that underwriters play an important role in monitoring newly public companies. The abnormal return is more negative for clients that are also lending clients, but is not significantly associated with the role of the underwriter as market maker or counterparty to investors.