Competition For Underwriting: Implications For Information Production And Insurance

Sudip Gupta, Rangarajan K Sundaram and M Suresh Sundaresan
Additional contact information
Sudip Gupta: Kelley School of Business and Indiana University
Rangarajan K Sundaram: Stern School of Business and New York University
M Suresh Sundaresan: Graduate School of Business, Columbia University

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: We examine a novel two-stage mechanism for selling securities. in stage 1, the security is underwritten but the underwriting is auctioned using a discriminatory auction. First stage winners join the second stage auction in which the security is sold. Here, winning underwriters have dual roles, as bidders and as insurers who must absorb excess security supply. While the government uses first-stage underwriting to insure against auction failure, we argue that it has important effects on bidding and information generation relevant to security pricing. Using proprietary data on treasury auctions in India between 2006 and 2012, we show that the underwriting auction is powerful in explaining auction outcomes including devolvement, bid shading, and post-auction price movements in the secondary market price. The direct costs of underwriting appear to be offset by its indirect benefits to the auction process, thereby lowering issuer cost of capital. We show that the winner’s curse risk of unsold inventory is a critical driver of our results. We confirm the importance of this channel by exploiting policy changes that induce natural variation in inventory costs differentially across bidders.

Pages: 48
Date: 2016-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.cafral.org.in/sfControl/content/Speech ... ndaresan_Dec2015.pdf
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.cafral.org.in:443 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022324

Access Statistics for this paper

More papers in Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL) Contact information at EDIRC.
Bibliographic data for series maintained by Vijayshree ().