Investment Bank Reputation and the Price and Quality of Underwriting Services

Abstract

The relationship between investment bank reputation and the price and quality of bond underwriting services is studied. After controlling for the endogeneity in issuer-underwriter matching, I find that reputable banks obtain lower yields, charge higher fees, while leaving issuers' net proceeds higher. These relations are particularly pronounced in the junk-bond category where reputable banks' underwriting criteria are found to be the most stringent. These findings suggest that banks' underwriting decisions reflect reputation concerns, and are thus informative of issue quality. They also suggest that economic rents are earned on reputation, which provide continued incentives for underwriters to maintain reputation.

Keywords: Investment banking, underwriting, reputation

JEL Classification: J24