The advent of the euro has eroded many of the barriers that segmented the European corporate bond market along currency lines and given rise to a unified market comparable in size to the one denominated in US dollars. In doing so, the new currency has made it easier for investment banks to explore scale economies in the provision of underwriting services, lowered the entry barriers to this industry, and made it easier for European borrowers to benefit from scope economies by combining their purchasing of commercial and investment banking services. This paper shows that the arrival of the euro led to a reduction in the underwriting fees of corporate bonds issued in the new currency and that this reduction was largely due to greater contestability of the investment banking business in the post-EMU European market. Our paper also shows that the elimination of market segmentation led to a migration of underwriting business towards the larger international investment banking houses, particularly those from the United States, rather than an intensification of the business links between euro area borrowers and bankers from the same country. Moreover, borrowers that chose American investment banks appear to have made extra savings in the underwriting fees. Finally, our analysis shows that these fee savings were not overcome by an increase in the credit spreads of these borrowers' bonds at issue date. Altogether, these results suggest that borrowers attach more weight to placing capacity than to business relationships in the choice of an underwriter.
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Paper provided by Bank for International Settlements in its series BIS Working Papers with number
134.
Find related papers by JEL classification: G15 - Financial Economics - - General Financial Markets - - - International Financial Markets G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
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Marco Pagano & Ernst-Ludwig von Thadden, 2004.
"The European Bond Markets under EMU,"
CSEF Working Papers
126, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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Other versions:
Arturo Bris & Yrjö Koskinen & Mattias Nilsson, 2009.
"The Euro and Corporate Valuations,"
Review of Financial Studies,
Oxford University Press for Society for Financial Studies, vol. 22(8), pages 3171-3209, August.
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Jong, A. de & Roosenboom, P.G.J. & Schramade, W.L.J., 2005.
"Bond underwriting fees and keiretsu affiliation in Japan,"
Research Paper
ERS-2005-038-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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