Tying Knots: Lending to Win Equity Underwriting Business

42 Pages Posted: 11 Nov 2003

See all articles by Steven Drucker

Steven Drucker

Renaissance Technologies LLC - Meritage Group

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Date Written: September 2003

Abstract

This article examines the practice of "tying," which occurs when an underwriter lends to an issuer around the time of public securities offering in order to secure underwriting business. We examine the following questions: (i) How far do investment banks compete directly in tying? (ii) How does tying affect issuers, and in particular, their financing costs? (iii) Why do underwriters tie lending to underwriting? We find that investment banks engage in a substantial amount of tying, contrary to concerns that they are disadvantaged by tying practices. We find that tying allows firms to reduce their financing costs, as tied issuers receive lower underwriter fees on seasoned equity offerings and discounted loan yield spreads. These results are robust to matching methodology developed by Heckman, Ichimura, and Todd (1997, 1998). Lower financing costs are consistent with informational economies of scope from combining lending with underwriting. From the underwriters' perspective, we find that tying helps build relationships that augment an underwriter's expected investment banking revenues by increasing the probability of receiving both current and future equity underwriting business.

Suggested Citation

Drucker, Steven and Puri, Manju, Tying Knots: Lending to Win Equity Underwriting Business (September 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=444160 or http://dx.doi.org/10.2139/ssrn.444160

Steven Drucker

Renaissance Technologies LLC - Meritage Group

800 Third Ave
New York, NY 10022
United States

Manju Puri (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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