Underwriter Competition and Institutional Loan Pricing

Abstract

We propose and document underwriter competition as an important determinant for institutional loan rates. We hypothesize that competition affects underwriters' trade-off between bidding low initial rates to win underwriting mandates and incurring reputational costs when adjusting rates upward in the book-building process. Consistent with this hypothesis, we find that more intense underwriter competition in a given market segment is associated with lower initial loan spreads, more upward rate adjustments during book-building, and lower final loan spreads. The impact of underwriter competition is moderated by investor demand uncertainty and prior borrower-underwriter relationships.

Keywords: Institutional Loans, Underwriter Competition, Relationship Lending, Loan Markets

JEL Classification: G21, G23, G24, G10