Underwriter Competition and Bargaining Power in the Corporate Bond Market

Research output: Working paperDiscussion paperOther research output

Abstract

We develop a new measure of underwriter bargaining power and a novel empirical approach, based on underwriters’ comparative ability to place bonds. When an issuer has few “outside options” to take her bond to the market, the underwriter enjoys a stronger bargaining power over her. The key feature of our approach is that bargaining power varies for a given underwriter at a given point in time across different issuers, allowing us to separate the effects of bargaining 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. For issues with the highest underwriter bargaining power, fees and bond offering yields increase by a combined cost of USD 1.5 million, or about 7% of the average costs for the issuer. We rule out alternative mechanisms based on issuer-underwriter “loyalty”. Our findings suggest that lack of competition increases underwriter bargaining power, resulting in material costs for corporate bond issuers.
LanguageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages47
Volume2018-034
StatePublished - 11 Sep 2018

Publication series

NameCentER Discussion Paper
Volume2018-034

Fingerprint

Bargaining power
Corporate bonds
Underwriters
Bond market
Costs
Outside options
Expenses
Fixed effects
Average cost
Loyalty
Fees
Rent
Certification

Keywords

  • Bargaining power
  • corporate bonds
  • underwriting

Cite this

Manconi, A., Neretina, E., & Renneboog, L. (2018). Underwriter Competition and Bargaining Power in the Corporate Bond Market. (CentER Discussion Paper; Vol. 2018-034). Tilburg: CentER, Center for Economic Research.
Manconi, Alberto ; Neretina, Ekaterina ; Renneboog, Luc. / Underwriter Competition and Bargaining Power in the Corporate Bond Market. Tilburg : CentER, Center for Economic Research, 2018. (CentER Discussion Paper).
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Manconi, A, Neretina, E & Renneboog, L 2018 'Underwriter Competition and Bargaining Power in the Corporate Bond Market' CentER Discussion Paper, vol. 2018-034, CentER, Center for Economic Research, Tilburg.

Underwriter Competition and Bargaining Power in the Corporate Bond Market. / Manconi, Alberto; Neretina, Ekaterina; Renneboog, Luc.

Tilburg : CentER, Center for Economic Research, 2018. (CentER Discussion Paper; Vol. 2018-034).

Research output: Working paperDiscussion paperOther research output

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T1 - Underwriter Competition and Bargaining Power in the Corporate Bond Market

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AB - We develop a new measure of underwriter bargaining power and a novel empirical approach, based on underwriters’ comparative ability to place bonds. When an issuer has few “outside options” to take her bond to the market, the underwriter enjoys a stronger bargaining power over her. The key feature of our approach is that bargaining power varies for a given underwriter at a given point in time across different issuers, allowing us to separate the effects of bargaining 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. For issues with the highest underwriter bargaining power, fees and bond offering yields increase by a combined cost of USD 1.5 million, or about 7% of the average costs for the issuer. We rule out alternative mechanisms based on issuer-underwriter “loyalty”. Our findings suggest that lack of competition increases underwriter bargaining power, resulting in material costs for corporate bond issuers.

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KW - underwriting

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Manconi A, Neretina E, Renneboog L. Underwriter Competition and Bargaining Power in the Corporate Bond Market. Tilburg: CentER, Center for Economic Research. 2018 Sep 11, (CentER Discussion Paper).