Does Reputation Talk? The Matching of Underwriters and Issuing Firms

The purpose of this paper is to examine the role of reputation in the matching of underwriters and issuing firms in the straight corporate bond market in Japan. While the existing literature already investigates how the issuing firm chooses its underwriter at the time of issue, this paper uses initial and seasoned issues of straight corporate bonds to examine how the matching of underwriters and issuing firms changes over time. Data on individual issues of straight corporate bonds publicly issued in Japan between 25 February 1994 and 31 December 2009 are used to estimate models which explain how issuing firms match with underwriters. We measure the reputations of underwriters and issuing firms using each underwriter’s percentile rank in the underwriting market and the issuer’s percentile rank in the issuing proceeds, respectively. Changes in the rating of the issuing firm’s bonds are also used to measure reputation changes. Since the measures of reputation are computed for each individual bond issue, it is possible to compute how reputation changes over time. Much of the existing literature on underwriter choice focuses on how underwriter choices change between the initial public offering (IPO) and seasoned equity offering (SEO). We construct a data set of straight corporate bond issues which includes many repeated issues. One of the contributions in this paper is to take account of these repeated issues by treating the data as a panel data set, and allowing for an issuer random effect. This random effect is found to be significant. The estimation results show that issuing firms match with the same underwriter when the difference of the issuer’s reputation and the current reputation of the previous underwriter is small. Issuing firms with an AAA rating at the time of issue are less likely to match with the same underwriters. In addition to reputation effects, there is strong evidence to suggest that issuing firms continue to stay matched with the same underwriter if the underwriter is a subsidiary of the issuing firm’s main bank.