The Tying of Lending and Equity Underwriting

Steven Drucker and Manju Puri

No 10491, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G2 (search for similar items in EconPapers)
Date: 2004-05
New Economics Papers: this item is included in nep-cfn
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as Steven Drucker & Manju Puri, 2004. "Tying knots: lending to win equity underwriting business," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 428-435.

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