Abstract ABSTRACT: A theoretical model that explicitly Incorporates the relation between investment banker and auditor is developed to provide a framework for testing the effect of auditor selection in the Initial market for unseasoned equity Issues. The theoretical model generates a number of testable propositions. Consistent with stylized facts, the theory suggests that high reputation Investment bankers will more frequently use high reputation auditors, and that both Investment banker and auditor reputation help to reduce underpricing. As either reputational variable Increases, the model predicts that the Impact of the other variable will diminish. The empirical results confirm this more complex relation. The structure of the model documented in this research may explain the difficulties of previous studies in Identifying an empirical relation between auditor reputation and underpricing.
Bakers et al. (Sat,) studied this question.