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Debt issue costs and issue characteristics in the Eurobond market

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  • Arie Melnik

    ()

  • Doron Nissim

    ()

Abstract

This paper analyzes the issue costs and initial pricing of bonds in the international market. In particular, we investigate the determinants of three components of issue costs: underwriter fee, underwriter spread (the difference between the offering price and the guaranteed price to the issuer), and underpricing (the difference between the market price and the offering price). Total underwriter compensation increases with the bonds’ credit risk and maturity, but it is insignificantly related to issue size. Interestingly, underwriters appear to price some issue characteristics directly (by adjusting the fee) and other characteristics indirectly (by setting the guaranteed price). The two compensation components (fee and spread) are negatively related to each other. We provide evidence that this trade-off is consistent with income tax considerations, as well as with two-tier pricing by underwriters. We find no evidence of underpricing.

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File URL: http://www.icer.it/docs/wp2003/Melnik9-03.pdf
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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 09-2003.

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Length: 27 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:icr:wpicer:09-2003

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Keywords: International bonds; Issue costs; Underwriter compensation;

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References

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  1. Lee, Inmoo & et al, 1996. "The Costs of Raising Capital," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(1), pages 59-74, Spring.
  2. Jewell, Jeff & Livingston, Miles, 1998. "Split Ratings, Bond Yields, and Underwriter Spreads," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 21(2), pages 185-204, Summer.
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  8. Wasserfallen, Walter & Wydler, Daniel, 1988. " Underpricing of Newly Issued Bonds: Evidence from the Swiss Capital Market," Journal of Finance, American Finance Association, vol. 43(5), pages 1177-91, December.
  9. Miles Livingston & Robert E. Miller, 2000. "Investment Bank Reputation and the Underwriting of Nonconvertible Debt," Financial Management, Financial Management Association, vol. 29(2), Summer.
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  12. Sorensen, Eric H, 1979. "The Impact of Underwriting Method and Bidder Competition upon Corporate Bond Interest Cost," Journal of Finance, American Finance Association, vol. 34(4), pages 863-70, September.
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Cited by:
  1. Sebastián Nieto Parra, 2008. "Who Saw Sovereign Debt Crises Coming?," OECD Development Centre Working Papers 274, OECD Publishing.
  2. Andrea Resti & Andrea Sironi, 2005. "The Basel Committee Approach To Risk-Weights And External Ratings: What Do We Learn From Bond Spreads?," Temi di discussione (Economic working papers) 548, Bank of Italy, Economic Research and International Relations Area.
  3. Kollo, Michael G., 2005. "Underwriter competition and gross spreads in the eurobond market," Working Paper Series 0550, European Central Bank.

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