Third-party underwriting and its effects on credit spreads and earnings management

Huaili Lyu and Conghui Yang

China Finance Review International, 2019, vol. 10, issue 1, 75-94

Abstract: Purpose - The purpose of this paper is to examine the certification and monitoring motivations of third-party underwriting and its effects on credit spreads and earnings management of bank issuers. Design/methodology/approach - Ordinary least squares is used to examine the certification and monitoring effects of third-party underwriting. Furthermore, the Heckman two-stage estimation method is used in controlling the endogeneity of sample selection. Findings - The authors find that financial bonds underwritten by third-party underwriters bear lower credit spreads due to their crediblyex antecertification and effectivelyex postmonitoring compared with self-underwriting. Moreover, the certification of third-party underwriters can help to select good quality bond issuers with lower earnings management, and the monitoring function also plays an essential role in constraining the behavior of earnings management after the bond issues. Research limitations/implications - The findings in this study suggest that underwriting types (third-party underwriting) will affect financial bond yields and bank issuers’ earnings management. Practical implications - On the one hand, the authors should encourage third-party underwriters to actively promote the certification and monitoring functions. For example, given commercial banks the chance to be underwriters when the bond issuers are investment banks, which is not allowed now in China’s financial bond market. On the other hand, the authors should cut off the quid pro quo relations within third-party underwriting because such relations will reduce the certification and monitoring effects of third-party underwriters. Originality/value - This is the first study to distinguish the certification and monitoring effects by using unique data from China’s financial bond market. And the authors further investigate the adverse effects of quid pro quo relations (hiring each other as lead underwriters) on the certification and monitoring effects of third-party underwriters.

Keywords: Earnings management; Credit spreads; Quid pro quo relations; Third-party underwriting; G21; G24; G32; G38 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-07-2018-0067

DOI: 10.1108/CFRI-07-2018-0067

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