Underwriter reputation and pricing of risk: evidence from seasoned equity offerings

Do banks and industrial companies have equal access to reputable underwriters in debt markets?

“…Supporting the certification hypothesis, prior studies find that issuers' lack of experience is negatively related to the probability of a reputable matching (Andres, et al, 2014;Cao et al, 2014;Fang, 2005;Fernando et al, 2005;Yasuda, 2005). Reputable underwriters are less likely to place a bond of a relatively inexperienced issuer, thus putting their reputation at stake.…”

“…This positive assortative selection leads us to consider not just a simple issuerunderwriter matching but a reputable matching. Generally, this strand of literature has provided empirical evidence on the (deal-level and issuer-level) determinants of the reputable matching, highlighting that deal size and issuer size are particularly relevant (Andres et al, 2014;Cao et al, 2014;Dong et al, 2011;Fang, 2005;Fernando et al 2005;Lee and Masulis, 2011;Loureiro, 2010;Neupane and Thapa, 2013). To the best of our knowledge, there is no empirical evidence about these determinants for banking corporate bonds.…”

“…Theoretical models explain the value of external certification based on informational asymmetries between firms and investors (Baron, 1982;Baron & Holmstrom, 1980;Rock, 1986). Similarly, the issuer-underwriting matching is affected by asymmetries between issuers and underwriters when the former are in need of certification (Cao et al, 2014;Fang, 2005;Fernando, Gatchev, & Spindt, 2005;Yasuda, 2005). The role of reputation in the certification market is twofold.…”

“…Besides, any differences in the effects of performance or solvency indicators may reveal some institutional advantage (due to regulatory or market differences), which is worth investigating in any case. Issuers' leverage, ROA and total assets are included to control for the level of indebtedness, profitability and issuer size (as in, for example, (Cao et al, 2014;Fang, 2005;Fernando et al, 2005;Fernando et al, 2015;Lou and Vasvari, 2013;Loureiro, 2010).…”

“…Sole underwriter deals are easy to classify using the league tables but when a syndicate has placed the bond, there are different alternatives. Traditionally, those who have discretized the market share have considered a deal as reputably underwritten if at least one of the underwriters is at the top of the selected ranking (Andres et al, 2014;Cao et al, 2014;Fang, 2005;Fernando et al, 2005). As syndicate deals are common in Europe, the chance of considering a bond as reputably underwritten following such a criterion increases.…”