Does it pay to be loyal? An empirical analysis of underwriting relationships and fees

Burch, Timothy R.; Nanda, Vikram; Warther, Vincent A.

doi:10.1016/j.jfineco.2004.08.007

Cited by 83 publications

(31 citation statements)

References 11 publications

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“…The first such channel is economies of scale. James (1992) and Burch et al (2005) show that set-up costs in the IPO due diligence process create durable relationship capital that lowers underwriting spreads for firms that are expected to issue equity again, and Kovner (2010) provides evidence of valuable relationship capital being created for IPO clients. Equity underwriters also create significant value for their clients by monitoring (Hansen and Torregrosa (1992)) and investing in the development and maintenance of institutional investor networks that serve as channels not only for collecting information but also for the distribution of shares through book building, thereby reducing the indirect costs of equity offerings.…”

Section: A Firm-investment Bank Relationshipsmentioning

confidence: 99%

“…Equity underwriters also create significant value for their clients by monitoring (Hansen and Torregrosa (1992)) and investing in the development and maintenance of institutional investor networks that serve as channels not only for collecting information but also for the distribution of shares through book building, thereby reducing the indirect costs of equity offerings. 2 Finally, the presence of switching costs also suggests that an underwriting relationship will be valuable because of the cost of rupturing it to establish a new equity underwriting relationship (Burch et al (2005) and Ellis et al (2006)). However, these studies do not account for the added benefit that firms may receive by employing a higher quality underwriter.…”

Section: A Firm-investment Bank Relationshipsmentioning

confidence: 99%

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The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

May

Megginson

2011

SSRN Journal

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We examine the long-standing question of whether firms derive value from investment bank relationships by studying how the Lehman collapse affected industrial firms that received underwriting, advisory, analyst, and market-making services from Lehman. Equity underwriting clients experienced an abnormal return of around -5%, on average, in the 7 days surrounding Lehman's bankruptcy, amounting to $23 billion in aggregate risk-adjusted losses. Losses were especially severe for companies that had stronger and broader security underwriting relationships with Lehman or were smaller, younger, and more financially constrained. Other client groups were not adversely affected.

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Section: A Firm-investment Bank Relationshipsmentioning

confidence: 99%

Section: A Firm-investment Bank Relationshipsmentioning

confidence: 99%

The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

May

Megginson

2011

SSRN Journal

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“…SDC comprises both equity and bond data and is widely used in securities underwriting studies (e.g. Fang (2005), Burch, Nanda and Warther (2005)) as it provides more information on underwriters such as the current parent bank of the underwriter, or underwriting allocations. The corporate bond coverage of the two databases does not completely overlap, and sets of missing values across FISD and SDC for jointly defined variables also differ.…”

Section: Appendix B Sample Constructionmentioning

confidence: 99%

“…For instance, at first glance, market share could seem a reasonable proxy for bargaining power. However, market share could also stand for the certification value of the underwriter's reputation as a signal of bond quality (Booth and Smith (1986)); and indeed, the literature has used it as a proxy for both power (Burch, Nanda, and Warther (2005)) and reputation/certification ability (Livingston and Miller (2000)). Similar considerations apply to alternative proxies such as past performance (Nanda and Yun (1997), Dunbar (2000)) or industry specialization (Dunbar (2000)).…”

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confidence: 99%

“…Second, our work contributes to the literature on underwriter selection. Thus far, this strand of literature has highlighted driving factors such the underwriter's prestige and expertise (Ritter and Welch (2002); Liu and Ritter (2011);Logue, Rogalski, Seward, and Foster-Johnson (2002)), 9 reputation and certification ability (Livingston and Miller (2000); Fang (2005)), and loyalty (Yasuda (2005); Burch, Nanda, and Warther (2005)). Our results point to competition among potential underwriters -or rather, lack thereof -as an additional factor.…”

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confidence: 99%

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Underwriter Competition and Bargaining Power in the Corporate Bond Market

2018

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We develop a new measure of underwriter bargaining power and a novel empirical approach, based on underwriters' comparative ability to place bonds. When an issuer has few "outside options" to take her bond to the market, the underwriter enjoys a stronger bargaining power over her. The key feature of our approach is that bargaining power varies for a given underwriter at a given point in time across different issuers, allowing us to separate the effects of bargaining power from those of reputation and certification with a fixed effects strategy. Using our measure, we document that powerful underwriters are able to extract rents at the expense of bond issuers. For issues with the highest underwriter bargaining power, fees and bond offering yields increase by a combined cost of USD 1.5 million, or about 7% of the average costs for the issuer. We rule out alternative mechanisms based on issuer-underwriter "loyalty". Our findings suggest that lack of competition increases underwriter bargaining power, resulting in material costs for corporate bond issuers.JEL codes: G32, G24 Keywords: Bargaining power; Corporate bonds; Underwriting 2 The global bond market is a major source of corporate financing. It has almost tripled in size since 2001, reaching nearly $50 trillion in outstanding value as of 2013 (Tendulkar andHancock (2014)). At the same time, the bond underwriting industry has become increasingly more concentrated, with a handful of very large banks underwriting the bulk of deals (Levinson (2014, p. 78)): in 2013, the ten largest underwriters had a combined market share of about 80%, up from 55% in 2000 and 30% in 1990. 1 Industry practitioners as well as the financial press have raised concerns that this may give disproportionate power over the issuance process to a few large underwriters, enabling them to extract rents to the detriment of corporate bond issuers. 2 In this paper, we address this concern and ask whether, and to what extent, underwriter power has an impact on corporate bond contracts.The main challenge for any study of bargaining power is identification, because the underwriter's power itself is unobservable and often overlaps with her reputation. For instance, at first glance, market share could seem a reasonable proxy for bargaining power. However, market share could also stand for the certification value of the underwriter's reputation as a signal of bond quality (Booth and Smith (1986)); and indeed, the literature has used it as a proxy for both power (Burch, Nanda, and Warther (2005)) and reputation/certification ability (Livingston and Miller (2000)). Similar considerations apply to alternative proxies such as past performance (Nanda and Yun (1997), Dunbar (2000)) or industry specialization (Dunbar (2000)). Disentangling the impact 1 Based on issuance data from Mergent FISD and SDC; the deal size (par value of bonds) is fully assigned to each lead underwriter. 3 of the "bargaining power" and "certification" channels, therefore, requires a measure of underwriter bargaining power th...

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Debt Offerings

Iannotta

2009

Investment Banking

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Does it pay to be loyal? An empirical analysis of underwriting relationships and fees

Cited by 83 publications

References 11 publications

The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

Underwriter Competition and Bargaining Power in the Corporate Bond Market

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