RELATIONSHIPS AND UNDERWRITER SPREADS IN THE EUROBOND FLOATING RATE NOTE MARKET

Authors


  • The views and opinions in this article are those of the authors and do not necessarily reflect those of the Australian Prudential Regulation Authority. The authors would like to thank Vince Hooper, Suk-Joong Kim, Gabriel Noti, Ronan Powell, Li-Anne Woo, William T. Moore (former executive editor), Vikram Nanda (reviewer), and participants at the 15th Australasian Finance and Banking Conference 2002, at the 2003 FMA annual meetings, and at research workshops at the University of Melbourne, University of Technology Sydney, and the University of New South Wales for helpful comments on earlier drafts. The Australian Research Council provided financial support for the project.

Abstract

We examine the role of issuer-underwriter relationships in determining underwriter spreads for Eurobond floating rate notes from 1992 to 2002. Financial and nonfinancial firms with long-term relationships pay a higher underwriter spread. Financial issuers that switch underwriters receive a discounted spread that is invariant to the underwriter's reputation and quality of the issue. However, the discount is not evident for nonfinancial firms. For both financial and nonfinancial firms, spreads are higher for noninvestment grade issues and, within investment grade, increase as quality declines. We also find higher spreads when underwriting is syndicated, and a strong negative time trend consistent with increasing competitive pressures.

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