Underwriter Competition and Bargaining Power in the Corporate Bond Market

63 Pages Posted: 11 Jan 2018 Last revised: 6 Sep 2019

See all articles by Alberto Manconi

Alberto Manconi

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Ekaterina Neretina

University of Southern California - Marshall School of Business

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Date Written: July 1, 2019

Abstract

We study the impact of underwriter competition on corporate bond contracts. We develop a new measure of underwriter power and a novel empirical approach, based on the underwriter’s comparative ability to place bonds. When an issuer has few "outside options" to take his bond to the market, the underwriter enjoys a stronger bargaining power over the issuer. The key feature of our approach is that underwriter power varies within a given underwriter at a given point in time across different issuers, allowing us to separate the effects of 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, in the form of higher fees, issuance yield spreads, and underpricing. Issuers facing underwriters with the highest bargaining power have a $1.5 million higher issuance cost, or about 16% relative to the average issue. A number of checks rule out alternative explanations based on certification, loyalty, and omitted issuer and/or issue characteristics. Our findings suggest that lack of underwriter competition results in material costs for corporate bond issuers.

Keywords: Competition; Bargaining power; Corporate bonds; Underwriting

JEL Classification: G32; G24

Suggested Citation

Manconi, Alberto and Neretina, Ekaterina and Renneboog, Luc, Underwriter Competition and Bargaining Power in the Corporate Bond Market (July 1, 2019). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 548/2018, Available at SSRN: https://ssrn.com/abstract=3098005 or http://dx.doi.org/10.2139/ssrn.3098005

Alberto Manconi (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://mypage.unibocconi.eu/albertomanconi/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ekaterina Neretina

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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