Liquidity and Issue Costs in the Eurobond Market: the Effects of Market Integration
We investigate and compare the issuance costs of Eurobonds before and after the completion of the Economic and Monetary Union (EMU) in 2002, and find that the introduction of the euro has significantly reduced the issue cost of euro-denominated bonds compared with bonds denominated in the legacy currencies. The reduction in issue cost was not due to a decrease in underwriter compensation, but rather to the elimination of underpricing (the difference between the market price after trading commences and the offering price). Underwriter fee has declined substantially after the EMU, but that decline was offset by an increase in the underwriter spread (the difference between the offering price and the guaranteed price to the issuer), leaving total underwriter compensation unchanged. The EMU is also associated with significant reductions in bond maturity and syndicate size, consistent with its expected effects on liquidity and issue costs in the Eurobond market.
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