Working Paper: NBER ID: w10491
Authors: Steven Drucker; Manju Puri
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.
Keywords: No keywords provided
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tying lending to equity underwriting (G21) | Lower financing costs for issuers (G32) |
| Tying lending to equity underwriting (G21) | Reduced underwriter fees (G19) |
| Tying lending to equity underwriting (G21) | Discounted yield spreads on tied loans (E43) |
| Tying lending to equity underwriting (G21) | Increased likelihood of securing current and future underwriting business (G52) |
| Tying lending to equity underwriting (G21) | Increased probability of receiving future equity underwriting mandates (G24) |
| Tying lending to equity underwriting (G21) | Increased likelihood of proceeding with subsequent equity offerings (G24) |
| Tying lending to equity underwriting (G21) | Increased likelihood of retaining the same underwriter for future transactions (G32) |