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Investment Bank Reputation and the Price and Quality of Underwriting Services



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    • Lily Hua Fang is from Finance Area, INSEAD. This paper is based on a chapter of my dissertation. I am indebted to my advisors, Gary Gorton, Robert Holthausen, Andrew Metrick, David Musto, and Ayako Yasuda for their guidance and support. I owe special thanks to an anonymous referee, whose insightful comments helped me improve the paper greatly. I also want to thank Franklin Allen, John Core, Petra Todd, Jay Ritter, and Robert Stambaugh (the editor) for valuable feedback. Comments and suggestions from seminar participants at Boston College, INSEAD, University of Colorado (Boulder), University of Oregon, University of Washington, Washington University in St. Louis, Yale School of Management, Wharton, and the NY Federal Reserve are gratefully acknowledged. Last but not least, I thank Robert Kiernan and Jack Malvey at Lehman Brothers and Cheryl Francis at RR Donnelly for generously spending time to share their insights with me. All omissions and errors are my own.


The relation between investment bank reputation and the price and quality of bond underwriting services is studied here. After controlling for endogeneity in issuer–underwriter matching, I find that reputable banks obtain lower yields and charge higher fees, but issuers' net proceeds are higher. These relations are pronounced in the junk-bond category, in which reputable banks' underwriting criteria are most stringent. These findings suggest that banks' underwriting decisions reflect reputation concerns, and are thus informative of issue quality. They also suggest that economic rents are earned on reputation, and thereby provide continued incentives for underwriters to maintain reputation.