The Impact of Underwriter Reputation on Bond Fees and Yields during the Global Financial Crisis

Abstract

We explore the relationship between underwriter reputation and pricing (fee and yield) of corporate bond underwriting services in the U.S. during the global financial crisis (GFC) of 2007-2009. We compare the effect of underwriter reputation on bond pricing during the GFC with that in pre- and post-crisis periods. We find that during non-crisis times, reputable underwriters charge premium fees and obtain lower yields. However, during the crisis period, the relationship between underwriter reputation and fee and yield is reversed. Reputable underwriters charge lower fees and obtain higher yields compared to less reputable underwriters. A plausible explanation for this finding lies in the tarnished reputation of large banks and the resulting competitive advantage gained by less reputable banks. However, the certification effect of reputable underwriters is restored following the crisis period, resulting in premium fees and lower yields.

Keywords: GFC, Underwriter reputation, Certification hypothesis, Fees, Yield