Share pledge, information advantage, and brokers’ SEO underwriting competition

Abstract

This study investigates how brokerage firms’ involvement in share pledge transactions affects their competitiveness in underwriting seasoned equity offerings (SEOs). We find that brokerage firms acting as pledgees are more likely to serve as underwriters for issuers whose blockholders have established share pledge relationships with them. Consistent with the information advantage mechanism, we show that pledgee brokers’ underwriting advantage is more pronounced when they obtain richer issuer-specific information through share pledges, internal information flows face fewer frictions, such advantages are more valuable, and issuers are subject to higher information uncertainty. Moreover, compared with SEOs underwritten by non-pledgee brokers, those underwritten by pledgee brokers exhibit lower offer discounts and better post-issuance stock performance, suggesting that information advantages derived from share pledges help reduce equity financing cost. Overall, our findings indicate that pledgee brokers gain a competitive edge in SEO underwriting by leveraging information from share pledge transactions.