Underwriting Syndicates in BRIC Countries: Determinants of Syndicate Size and Member Selection

The process of startup firms raising capital through equity markets by issuing shares to the public is a strong sign of financial growth and innovation. Going public requires the issuing firm to share information with potential investors and requires financial institutions to underwrite the effort, typically through a syndicate. The underwriting syndicate is a coalition of competing banks that serve as intermediaries between the firm and the investors. In emerging nations, this process is compounded by the differences in the maturity of the financial markets and the economic environment. The growth and significance of capital markets in the BRIC (Brazil, Russia, India, and China) nations offer a good laboratory to understand the formation of underwriting syndicates and their role as intermediaries in bridging the gap between savers and investors in asymmetric information settings. We empirically analyze the composition of the underwriting syndicate in BRIC nations, focusing on the size and characteristics of the underwriting syndicate and relate them to the growth of the equity market. We examine the role of underwriter reputation, underwriter social networks, and local/ international underwriters, as these attributes reflect the ability of the underwriter to reduce asymmetric information. We find that the probability that a bank is chosen to be a part of the syndicate is positively correlated to their reputation and their ability to network, and is greater if they are a local bank. Syndicate size is positively related to the size of the deal, and syndicate size becomes smaller over time. We conclude that the ability to produce information and promote this ability to outside parties is critical, especially in emerging markets, where information asymmetries are generally greater