The Tying of Lending and Equity Underwriting

44 Pages Posted: 27 May 2004 Last revised: 2 Sep 2010

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: May 2004

Abstract

This article examines the practice of tying,' which occurs when an underwriter lends to an issuer around the time of a public securities offering. We examine whether there are efficiencies from tying lending and underwriting which lead to benefits for issuers and underwriters. We find evidence consistent with tying occurring for issues when there are informational economies of scope from combining lending and underwriting. Firms benefit from tying through lower financing costs, as tied issuers receive lower underwriter fees on seasoned equity offerings and discounted loan yield spreads. These financing costs are significantly reduced for non-investment grade issuers, where informational economies of scope from combining lending with underwriting are likely to be large. These results are robust to matching methodology developed by Heckman, Ichimura, and Todd (1997, 1998). For underwriters, tying helps build relationships that augment an underwriter's expected revenues by increasing the probability of receiving both current and future business. Both commercial banks and investment banks tie lending and underwriting and offer price discounts, albeit in different ways, with commercial banks discounting loan yield spreads and investment banks offering reduced underwriter spreads.

Suggested Citation

Drucker, Steven and Puri, Manju, The Tying of Lending and Equity Underwriting (May 2004). NBER Working Paper No. w10491. Available at SSRN: https://ssrn.com/abstract=546288

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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