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Debt issue costs and issue characteristics in the Eurobond market

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Author Info
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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Publisher 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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Related research
Keywords: International bonds; Issue costs; Underwriter compensation;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G30 - Financial Economics - - Corporate Finance and Governance - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Gande, Amar, et al, 1997. "Bank Underwriting of Debt Securities: Modern Evidence," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(4), pages 1175-1202.
  3. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(1), pages 191-218.
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  6. Randall S. Kroszner & Raghuram G. Rajan, . "Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities Before the Glass-Steagall Act," CRSP working papers 325, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    Other versions:
  7. Melnik, Arie L. & Plaut, Steven E., 1996. "Industrial structure in the Eurocredit underwriting market," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 623-636, August. [Downloadable!] (restricted)
  8. Fung, W K H & Rudd, Andrew, 1986. " Pricing New Corporate Bond Issues: An Analysis of Issue Cost and Seasoning Effects," Journal of Finance, American Finance Association, vol. 41(3), pages 633-43, July. [Downloadable!] (restricted)
  9. Ang, James S. & Richardson, Terry, 1994. "The underwriting experience of commercial bank affiliates prior to the Glass-Steagall Act: A reexamination of evidence for passage of the act," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 351-395, January. [Downloadable!] (restricted)
  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Allen, David S & Lamy, Robert E & Thompson, G Rodney, 1990. " The Shelf Registration of Debt and Self Selection Bias," Journal of Finance, American Finance Association, vol. 45(1), pages 275-87, March. [Downloadable!] (restricted)
  13. 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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