Investment Bank Reputation and the Underwriting of Nonconvertible Debt

Abstract

We examine the impact of investment banker prestige on underwriter spreads, offering yields, and other expenses for 2,449 nonconvertible industrial debt issues offered during the period 1990 to 1997. We find that higher prestige underwriters charge significantly lower underwriting fees. Offering yields are also lower and offering prices are higher for prestigious underwriters, which indicates that investment banker reputation acts to certify the value of a debt issue to investors. Other issuance expenses paid by the issuer are also lower for debt underwritten by the more prestigious investment banking firms. Lastly, we show that repeat business with the same investment banking firm leads to lower underwriting fees but does not significantly affect "other expenses" paid by the issuer.