Elite law firms in the IPO market

Abstract

Abstract IPOs with underwriters that retain an elite law firm exhibit a lower average first-day return. This empirical pattern remains after controlling for an extensive set of proxies associated with existing explanations of IPO initial returns. We rationalize this finding with a pre-IPO pricing model, in which underwriters convey their lack of conflicts of interest to the issuer by engaging an elite law firm. Consistent with this selection channel and our model’s predictions, we find a lower incidence of elite law firm involvement and a larger difference in average first-day return associated with elite law firms during the dot-com period. We document similar findings with respect to the dispersion of IPO first-day returns and a pattern in the issuers’ re-hiring decision of investment banks consistent with our theory.