Essays on underwriting and reputation

Resumen

This doctoral thesis focuses on the analysis of different aspects of the intermediation role performed by specialized financial intermediaries known as underwriters in capital markets with the aim of contributing to the knowledge on the relationship between underwriting and reputation. The chapters are grouped around three specific issues. Firstly, this analysis explores the issuer‒reputable underwriting matching for non-financial issuers and banks. Then, the underwriting syndicate formation is examined. Finally, reputation is disentangled by examining the evolution of underwriters’ market shares. The first essay (second chapter) addresses the question of whether banks and industrial companies have equal access to debt markets through reputable underwriters. While the extant studies have been devoted to assessing the issuer‒underwriter reputational matching and its main determinants in non-financial deals, this paper contributes to the literature by examining this matching mechanism for banks. Based on a theoretical background regarding the informational differences between banks and non-financial firms, it seems reasonable to explore whether these differences also appear in their access to markets in which only banks can act as underwriters. The research question is empirically tested by comparing the likelihood of non-financial companies and banks matching with a reputable underwriter over the period 2003‒2013. The results show no differences before the crisis in the access of banks and non-financial companies to reputable underwriters, but banks had a lower probability during the subprime and banking crisis. These findings suggest that banks’ informational advantages in debt markets could be challenged over time, since the perceived quality of their distinctive certification role may change, especially as happened during the financial crisis, when other reputational issues affect the certification value. Furthermore, differences in the matching determinants are found; in particular, bond size has a greater effect on the matching probability for non-financial companies and bank size is relatively more decisive for banks. The second essay (third chapter) addresses the question of whether lending relationships may have an impact on the choice and structure of bond underwriting syndicates. While the common practice in issuing debt has moved from the use of a sole bank as an underwriter to underwriting syndication, this study aims to examine the reason for this change. In this sense, previous studies have argued that issuers’ relationships affect the probability of choosing a bank as an underwriter. However, there is no evidence on how the concentration of these relationships influences the decision on whether to syndicate the issuance or remain with a sole underwriter before and during the crisis as well as on the structure of the syndicate formation. Empirically, this essay firstly studies the choice of a single underwriter vs. multiple underwriters of the bond. Then, a probit model is employed to determine the likelihood that specific underwriters are included in a syndicate, including one observation for every potential underwriter for each bond allowing for correlation across all the eligible underwriters in a specific deal. Besides, we use an additional probit model that treats each underwriter in a syndicate deal as a different observation to examine the determinants of the syndicate structure from the perspective of the underwriter. Using a sample of European corporate bonds during the period 2003‒2013, the results obtained show that prior lending relationships have a significant impact on the syndicate choice and that this effect is particularly significant during the crisis. Furthermore, it is found that reputable banks refrain from joining a syndicate if they perceive that they are matching with less reputable counterparts. These results suggest that syndicate formation is driven by lending relationships as well as by underwriters’ reputational concerns. Finally, the third essay (fourth chapter) aims to explain underwriters’ market shares in corporate debt issuance. Theoretically and empirically, the role of intermediary reputation is well established through an examination of the way in which reputation affects pricing and performance. Empirical models in most cases use market share as a proxy for reputation, arguing that the highly prestigious underwriters are those with large market shares. However, the empirical evidence related to the evolution of underwriters’ market shares is sparse. This essay contributes to the literature analyzing the effects of pricing and non-pricing competitive factors on underwriters’ market shares in corporate bond markets. Furthermore, it explores how banks’ reputation as underwriters is affected when they receive state aid for recapitalization. In this sense, an examination of the effects of recapitalization measures is particularly relevant, since the information disclosed on the beneficiary might have an effect on a reputational business such as underwriting. Employing dynamic panel regressions, it is found that in Europe competition is not based either on charging abnormal fees or on abnormal pricing, unlike the situation in the U.S. capital markets. We find that offering highly reputable analysts with valuable research coverage during the placement process serves to attract business. Finally, the underwriter’s market share is also found to be positively affected by mandates that entail providing joint lending and underwriting services. Then, using a difference-in-difference approach, it is found that market shares are affected after being bailed out. While underwriters with large market shares (considered reputable underwriters) suffer losses in their underwriting market shares after being recapitalized (by 22.66% from their median market share), those underwriters without large market shares increase their market shares after being bailed out (by 63.66%). These results, robust to different identification and measurement checks, seem to be consistent with the reputational hypothesis.