Underwriter reputation and the quality of certification Evidence from high-yield bonds Accounting English 姓名：王海婷 学号：16720837 亮亮图文旗舰店https://liangliangtuwen.tmall.com

Basic Information Author Christian Andres , André Betzer , Peter Limbach Publishing source Journal of Banking & Finance Key Words Borrowing costs、 Certification、 Downgrade and default risk、 Reputation Publication time 1 December 2013

CONTENTS 01 02 03 04 05 Introduction Related Literature Review Hypothesis 04 Empirical Analysis 05 Conclusions

Introduction 01 Research Background Meaning Research Questions

Abstract This paper provides primary evidence of whether certification via reputable underwriters is beneficial to investors in the corporate bond market. We focus on the high-yield bond market in which certification of issuer quality is most valuable to investors owing to low liquidity and issuing firms’ high opacity and default risk. We find bonds underwritten by the most reputable underwriters to be associated with significantly higher downgrade and default risk. Investors seem to be aware of this relation, as we further find the private information conveyed via the issuer-reputable underwriter match to have a significantly positive effect on at-issue yield spreads. Our results are consistent with the market-power hypothesis, and contradict the traditional certification hypothesis and underlying reputation mechanism.

Debt Underwriting Fraud Competition Among Underwriters Research Background Debt Underwriting Fraud Competition Among Underwriters Significant cases of debt underwriting fraud over the past decade have called into question both traditional theory and empirical results that support the certification hypothesis for the corporate bond market. The GLBA led to intensified the competition among underwriters and a sharp decrease in investment banking fees, especially in the high-yield bond market in which commercial bank entry was strongest .

Research Questions Whether the most reputable underwriters are necessarily associated with the highest-quality underwriting standards 1 whether certification benefits investors in the bond market whether investors behave rationally in pricing the risk associated with reputable underwriters when bonds are issued 3 2

02 Related Literature Review

Related Literature Review Fang (2005) provides empirical support for the certification hypothesis for the 1991–2000 period. Controlling for endogenous matching between bond issuers and lead underwriters, she finds that reputable underwriters reduce issuing firms’ informational costs and earn economic rents on reputation. 1 Bouvard and Levy’s (2009) model document that incentives for reputable certifiers to lower their evaluation standards to attract future clients. Both models predict that competition reduces certifiers’ incentives to maintain high-cost evaluation standards to protect their reputations. 2 Shivdasani and Song((2011) suggest the results on underwriter certification may differ between the pre- and post-GLBA periods, particularly for the corporate bond market, in which competition increased most strongly around and after GLBA and was accompanied by sharp declines in underwriting fees 3 Chemmanur and Krishnan (2012) further suggest the potential for collusion between issuers and large, reputable underwriters that are able to attract, through their market power, a greater number of professional and retail investors. They show IPOs backed by high-reputation underwriters to be priced higher and further from intrinsic values 4

03 Hypothesis

Hypothesis H1 High-yield bonds underwritten by reputable underwriters are associated with significantly lower downgrade and default risk. H2 Reputable underwriters reduce issuing firms’ informational costs, that is, they credibly certify issuer quality in the high-yield bond market.

04 Empirical Analysis Sample Selection Analysis of The Data Definitions of Variables

Sample Selection Capital IQ (CIQ) database Bloomberg Data on original U.S. high-yield corporate bonds issued between January 1, 2000 and September 15, with an available credit rating history are collected from the Capital IQ database that provides rating histories for most bonds. In line with prior research, the paper exclude convertible debt as well as bonds issued by financial institutions. The paper check the data using Bloomberg to ensure that bonds are non-convertible, original speculative-grade issues. We end up with a sample of 635 high-yield bond issues for which initial bond prices and credit ratings are provided.

Sample Selection Excluding all bonds for which we are unable to gather full information leaves us with a final sample of 607 high-yield corporate bonds. The number of issuing firms being 374, on average, each firm in sample issues 1.6 bonds. As our sample contains private issuers, full accounting and auditor data is not available for all observations

Definitions of Key Variables Variable Description 1st rating action 如果首次信用评级是降级(在债券的到期日或在3、4或5年的债券发行中)降级，否则取0 . Benchmark spread 债券的发行收益率减去(发行时)美国国债的收益率 Downgrade first 6/15/24 months 如果债券的信用评级在6/15/24个月内信用评级被下调取1，否则取0. Downgrade 3/5 yrs 如果在债券发行的前3(或5年)债券信用评级被降级，那么这个假变量的值为1 Downgrades minus upgrades (3 yrs) 降级的数量减去升级的数量(在债券发行的期限内或者在债券发行的头3年里） Split rating 如果穆迪和标准普尔给出了初始发行评级则取1否则取0. Top 3 如果债券的主承销商在美国公司债券的承销商排行榜上排名前3则为1. NYSE/AMEX 发行公司在纽约证券交易所或美国证券交易所上市则取1，否则取0. Rating 评级等级 Default 在观察期内出现债券违约则取1，否则取0.

The Main Models Test H1 (bond performance and lead underwriter reputation) ： Y i =C0+ C1TOP3i +C2NumberUnderwriters i + C3NYSE/AMEXi +C4 Rating i+ C5 Split Rating i+ controls + εi Test H2(firms’ borrowing costs and lead underwriter reputation)： BS i =C0+ C1TOP3i +C2NumberUnderwriters i + C3NYSE/AMEXi +C4 Rating i+ C5 Split Rating i+ controls + εi

The probit regression results for short-term bond performance The table suggest that reputable lead underwriters are associated with significantly poorer bond performance

The probit regression results for Medium to long term bond performance The variable Top 3 has a positive impact on the probability of a bond’s first rating action being a downgrade, both within the first 3 years of issue (specifications 1 and 2) and in general (specification 4) Specifications (5) and (6) further suggest that bonds underwritten by Top 3 lead underwriters are also more likely to default. The corresponding regression coefficients are significant at the 1% and 5% level.

The second-stage regression result for H2 The results presented in Table 9 reject the second hypothesis (H2), the variable Top 3 is not positive and significant. reputable underwriters can not reduce issuing firms’ informational costs As the most reputable (Top 3) lead underwriters in the high-yield segment are significantly associated with poor bond performance (higher downgrade and default risk), investors that buy bonds underwritten by these reputable banks demand compensation.

05 Conclusions

Conclusions Corporate bonds underwritten by the most reputable lead underwriters to be associated with significantly higher downgrade and default risk, the most reputable underwriters increase rather than decrease issuing firms’ informational costs. 1 The reputation mechanism does not work for the most dominant banks in the syndicated loan market. This finding is consistent with the market efficiency hypothesis and calls into question the traditional certification hypothesis and underlying reputation mechanism. 2 Reduction of informational costs via certification is not necessarily the most important role reputable lead underwriters play, at least in the high-yield bond market, in which issuing firms have fewer financing opportunities and higher placement risks. It further suggests that underwriters may be chosen for reasons other than their certifier reputation. 3

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