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The Cost of Barriers to Entry: Evidence from the Market for Corporate Euro Bond Underwriting

João A. C. Santos

Federal Reserve Bank of New York

Kostas Tsatsaronis

Bank for International Settlements (BIS) - Monetary and Economic Department

September 2003

BIS Working Paper No. 134
EFA 2003 Annual Conference Paper

The advent of the euro has eroded many of the barriers that segmented the European corporate bond market along currency lines and given rise to a unified market comparable in size to the one denominated in US dollars. In doing so, the new currency has made it easier for investment banks to explore scale economies in the provision of underwriting services, lowered the entry barriers to this industry, and made it easier for European borrowers to benefit from scope economies by combining their purchasing of commercial and investment banking services. This paper shows that the arrival of the euro led to a reduction in the underwriting fees of corporate bonds issued in the new currency and that this reduction was largely due to greater contestability of the investment banking business in the post-EMU European market. Our paper also shows that the elimination of market segmentation led to a migration of underwriting business towards the larger international investment banking houses, particularly those from the United States, rather than an intensification of the business links between euro area borrowers and bankers from the same country. Moreover, borrowers that chose American investment banks appear to have made extra savings in the underwriting fees. Finally, our analysis shows that these fee savings were not overcome by an increase in the credit spreads of these borrowers' bonds at issue date. Altogether, these results suggest that borrowers attach more weight to placing capacity than to business relationships in the choice of an underwriter.

Number of Pages in PDF File: 33

Keywords: market segmentation, corporate bond underwriting, euro

JEL Classification: G15, G24, G32

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Date posted: September 20, 2007  

Suggested Citation

Santos, João A. C. and Tsatsaronis, Kostas, The Cost of Barriers to Entry: Evidence from the Market for Corporate Euro Bond Underwriting (September 2003). BIS Working Paper No. 134; EFA 2003 Annual Conference Paper. Available at SSRN: http://ssrn.com/abstract=301099 or http://dx.doi.org/10.2139/ssrn.301099

Contact Information

João A. C. Santos (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)
Konstantinos Tsatsaronis
Bank for International Settlements (BIS) - Monetary and Economic Department ( email )
Centralbahnplatz 2
CH-4002 Basel
(41 61) 280 8082 (Phone)
(41 61) 280 9100 (Fax)
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