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Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds

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  • Christian Andres

    ()
    (WHU - Otto Beisheim School of Management)

  • André Betzer

    ()
    (BUW - Schumpeter School of Business and Economics)

  • Peter Limbach

    ()
    (KIT - Karlsruhe Institute of Technology)

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    Abstract

    This paper provides primary evidence of whether certification via reputable underwriters is beneficial to investors in the corporate bond market. We focus on the high-yield bond market, in which certification of issuer quality is most valuable to investors owing to low liquidity and issuing firms’ high opacity and default risk. We find bonds underwritten by the most reputable underwriters to be associated with significantly higher downgrade and default risk. Investors seem to be aware of this relation, as we further find the private information conveyed via the issuer-reputable underwriter match to have a significantly positive effect on at-issue yield spreads. Our results are consistent with the market-power hypothesis, and contradict the traditional certification hypothesis and underlying reputation mechanism.

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    Bibliographic Info

    Paper provided by Universitätsbibliothek Wuppertal, University Library in its series Schumpeter Discussion Papers with number SDP13006.

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    Length: 54
    Date of creation: Aug 2013
    Date of revision:
    Handle: RePEc:bwu:schdps:sdp13006

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    Web page: http://elpub.bib.uni-wuppertal.de

    Related research

    Keywords: borrowing costs; certification; downgrade and default risk; reputation; underwriting standards;

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