The structure of investment bank syndicates

and the quality of bond underwriting

Arthur Krebbers

a, Andrew Marshall

b, Patrick McColgan

c

Abstract

We analyze how the structure of bookrunner syndicates affects the quality of their service to

issuers as reflected in the pricing of euro-denominated bond tranches. We find that domestic

banks obtain lower at-issue credit spreads for issuing firms, highlighting the importance of

ongoing banking relationships in achieving the highest quality of intermediary services. Larger

bookrunner syndicates are associated with higher credit spreads and the inclusion of a passive

bookrunner to the syndicate reduces credit spreads. Bookrunner reputation is of secondary

importance in the pricing of our sample bond tranches. We find significant changes in the

structure of bookrunner syndicates following the global financial crisis, and our findings on the

impact of bookrunner syndicates for pricing are driven by tranches issued during the post-crisis

period. This highlights that investors place greater emphasis on the information provided by

financial intermediaries when there is greater heterogeneity in syndicate structure during the

post-crisis period.

JEL Classification: G11, G12, G24

Keywords: At-issue credit spread; Bookrunner geography; Passive bookrunners.

a Department of Accounting and Finance, University of Strathclyde, Glasgow, G4 0QU, UK,

Email: Arthur.krebbers@strath.ac.uk.

b Department of Accounting and Finance, University of Strathclyde, Glasgow, G4 OQU, UK,

Tel: 44-141-548-3894, Email: a.marshall@strath.ac.uk

c Department of Accounting and Finance, University of Strathclyde, Glasgow, G4 0QU, UK,

Tel: 44-141-548-3690, Email: patrick.mccolgan@strath.ac.uk

We thank Robert Faff, Andrey Golubov, Peter Limbach, Dimitris Petmezas, seminar participants

at the 2015 BAFA Scottish Area Group Conference (Edinburgh), and the University of

Strathclyde for helpful comments on earlier drafts of this paper. All errors remain our own.

1

1. Introduction

The role of financial intermediaries as bookrunners1 on corporate bond tranches should be

relatively uncontentious. Bond bookrunners perform two main functions: they have a

certification role, evaluating the issuer and its prospects on behalf of investors (Chemmanur and

Fulghieri, 1994), and a placement role, which involves marketing and distributing the securities

(Kessel, 1971). The corporate bond market is dominated by large well-rated firms (Denis and

Mihov, 2003), the documentation and terms are standardized, typically devoid of complex

structures or covenants and the investors tend to be institutional. Yet research on the reputation

of financial intermediary syndicates in the bond market concludes that there is substantial

heterogeneity in the quality of service provided. For example Fang (2005) finds that the

reputation of an issuer’s lead bookrunner has a positive impact on the quality of service

provided. Shivdasani and Song (2011) find increased competition from commercial banks led to

an increase in the popularity of co-led bookrunner syndicates during the 1996 to 2000 economic

boom. However, these issuers were associated with a greater incidence of subsequent earnings

restatements and fraud lawsuits, suggesting that competition from commercial banks led to a

reduction in the quality of the financial intermediary services.

This paper seeks to provide new and further evidence on how the structure of financial

intermediary syndicates affects the quality of service they provide. We focus on the European

bond market to study bookrunner syndicates and the quality of their service due to changes in

funding patterns for European issuing firms and changes in regulations facing banks in Europe

after the financial crisis. Large European firms have been moving towards a more capital

1 The term bookrunner is more commonly used in European markets to describe investment banking activity in the

placement of corporate bonds. In European bond markets investment banks typically manage bond issues on a best

efforts basis and place capital at risk only for a very short period prior to placement of the bond with investors.

Banks’ primary function is to build the order book for bond tranches. As such, we use the term bookrunner to

describe the role of investment banks in placement and underwriting in this paper.

2

markets based model of funding, and external pressures on bookrunner syndicate structures have

grown since the global financial crisis (Eurofi, 2014). Stricter regulations since 2008 have forced

banks to maintain higher capital ratios and many have sought to develop more ancillary business

from their clients, including increased presence in bond issues (Chivukula et al., 2014). As a

result, banks have begun to place increasing pressure on issuing firms to offer more bond

bookrunner mandates, leading to an increase in bookrunner syndicate sizes (Stothard, 2013).

However bond issuers have recognized possible inefficiencies in large syndicates and have

adopted bookrunner distinctions (active and passive) that leave the placement role in the hands of

active bookrunners.2 Banks that the issuer feels are less capable of performing the placement

roles for the envisaged tranche can be relegated to a passive status.3 It is now increasingly

common in European bond markets for a subset of banks to be relegated to a passive certification

role (Moore, 2009; Stothard, 2013). Therefore we suggest that the decision on how best for

issuers to structure their bookrunner syndicates has become increasingly important in the

European bond market.

With the exception of Fang (2005) who examines the decision to appoint a high

reputation investment bank, and Shivdasani and Song (2011) who examine the decision to

appoint co-led underwriting syndicates, there is little evidence on the relation between

bookrunner syndicate structure and the quality of intermediary service provided in the bond

market. Therefore this paper examines the impact of reputation and three additional related

characteristics of the overall bookrunner syndicates on the quality of services provided, as

2 Bookrunners who perform both roles are classified as active bookrunners; if only certification they are classified as

passive bookrunners. 3 Note that this distinction is different from the practice of selecting lead bookrunners. Lead bookrunners purely

coordinate the placement role, but they do not perform it exclusively. In the euro-denominated bond market there is

no designated lead underwriter or advisor, which is the focus of much of this prior literature on US investment

banking syndicates.

3

measured by the at issue spread. We also examine whether the relation between bookrunner

syndicate structure and quality of service changed surrounding the period of the global financial

crisis.

First, we consider the size of the bookrunner syndicate. Increasing the number of

intermediaries running the order book could provide benefits to the issuer through ability to sell

bonds to a large group of potential investors (Kessel, 1971), but can increase coordination and

free-rider difficulties within the syndicate (Diamond, 1996; Shivdasani and Song, 2011).

Second, we consider the assigned roles of the bookrunners in the syndicate as either

passive or active. As the active placement role involves higher possible coordination

inefficiencies and free-rider risks, limiting the number of active bookrunners involved in

placement is expected to reduce free-rider costs. On the other hand including a passive

bookrunner in the syndicate rather than appointing an additional active bookrunner can limit

coordination costs and a possible improvement in quality of intermediary service.

Third, we examine the role of bookrunner reputation, based on their ranking in corporate

bond league tables, on the quality of intermediary service. Bond issuers appoint reputable

bookrunners; on the basis that these intermediaries will be incentivized to perform better quality

services so as to maintain a high league ranking and therefore strong reputation (Chemmanur and

Fulghieri, 1994). Alternatively this high reputation group of bookrunners can be oligopolistic and

distrusted by investors if they are seen to exploit their reputation to sell low quality tranches to

generate higher fee income (Chemmanur and Krishnan, 2012). We also extend this literature to

examine how intermediary reputation interacts with bookrunner’s assigned role in the syndicate

and the geographic location of bookrunners to affect the quality of service provided.

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Fourth, issuers in European bond markets can choose between domestic and non-

domestic bookrunners. This is important as European capital markets are characterized by a

relatively high degree of information, cultural and linguistic barriers. We argue that domestic

banks are better placed to carry out a certification role and understand an issuer’s preferences in

regards to the placement role through ongoing relationships with the issuing firm. Alternatively,

a domestic bank can be argued to be weaker in the placement role as they are less able to attract

price-competitive international investors to the offering (Massa and Zalkodas, 2014).

Finally, as our sample data spans the 2008 global financial crisis, an event which had a

direct impact on regulations facing banks and corporate bond credit spreads we consider if there

has been changes in the relation between bookrunner syndicate structure and quality of service

over this period. The post-crisis time period is characterized by a significant increase in

syndicate size and an increased propensity to appoint passive bookrunners. This allows issuing

firms to differentiate tranche quality through the structure of the financial intermediary group.

Our sample comprises 1,224 investment grade euro-denominated public bond tranches

issued by 324 Western European firms between 2001 and 2012. The bond tranches are

significantly more homogeneous than earlier bond market studies and the issuers are generally

large and well-established firms in the European capital markets. Theoretically, differences

between the at-issue credit spread for these tranches should be small and fully explainable by

tranche characteristics such as the rating, tenor and issue size (Longstaff et al., 2005). Therefore

the influence of financial intermediaries should be limited for these issuers and therefore our

sample provides a rigorous test of the residual influence of bookrunner characteristics on the

quality of their service.

5

After controlling for endogenous matching of issuers and bookrunners we find that the

trend of increasing bookrunner syndicate size is detrimental to the quality of service. We

interpret this as evidence of coordination and free-rider problems in the placement of bond

tranches. However, bond issuers are able to lower the at-issue credit spreads and reduce the free-

rider costs of larger syndicates through introducing passive bookrunners to the syndicate.

The effect of bookrunners geography is to our knowledge untested in the literature and

we find that the fraction of non-domestic, active non-domestic bookrunners and high reputation

active non-domestic bookrunners is negatively related to the quality of intermediary service. This

suggests that domestic bookrunners are able to achieve a higher price for bonds issued by virtue

of having a stronger banking relationship and becoming more informed about the issuer. We also

find that bookrunner reputation is of secondary importance to the pricing of bond tranches. When

we exclude geographical effects, we find that higher reputation bookrunners are able to offer

better quality services, which is consistent with the reputation theory of Fang (2005). However,

the benefits of using domestic bookrunners outweigh reputation effects.

The significance of our results is driven by tranches issued after the 2008 global financial

crisis. Prior to the financial crisis we find no relation between bookrunner syndicates and quality

of service in the euro-denominated investment grade bond market. The post crisis period is

characterized by larger bookrunner syndicates and increased segregation in bookrunner roles

between active and passive. This makes within syndicate coordination and free-rider costs more

of a concern and strengthens the benefits from introducing passive bookrunners to the syndicate.

Our findings contribute to several strands of finance literature. First, they add to literature

on the growing importance of intermediary relations in increasingly competitive markets for

bond underwriting (Shivdasani and Song, 2011). Our new findings on bookrunner geography

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suggest that bookrunners are likely to increasingly focus on a particular set of clients they are

able to develop a strong relationship with, such as a geographical focus.

Second, our study adds to the debt market agency literature which typically focuses on

debtholder-shareholder conflicts (Jensen and Meckling, 1976). We find that the size and role

split of a bookrunner syndicate have a significant impact on the at-issue credit spread and

interpret this as evidence of intra-bookrunner agency costs. As funding markets become more

reliant on intermediated sources of capital, such agency costs become increasingly important

(Shivdasani and Song, 2011). Moreover, the growth in bookrunner syndicate sizes will require a

clearer role differentiation between syndicate members.

Third, our findings contribute to the literature on the impact of the global financial crisis

on the role of financial intermediary syndicates. The relation between syndicate structure and

credit spreads in the post crisis period highlights that the relative importance that investors and

issuers place on the certification and placement functions of financial intermediaries varies over

time with financial market conditions.

Finally, our results add to the literature on the determinants of bond credit spreads

(Longstaff et al., 2005). Post-financial crisis, bank capital legislation has made the secondary

market for corporate bonds increasingly illiquid (International Capital Market Association, 2014)

and therefore the determinants of the primary market credit spread increasingly relevant for

investors. We suggest that models seeking to evaluate the at-issue credit spread should

incorporate the various aspects of the bookrunner syndicate composition.

The remainder of this paper is organized as follows. Section 2 develops our testable

hypotheses. Section 3 describes the sample selection process, our dependent variable of the

quality of bookrunner services, and the empirical determinants. Section 4 describes our

7

regression design. Section 5 reports the results of our empirical analysis. Finally, Section 6

concludes.

2. Hypotheses development

In this section we develop our empirical predictions relating to the four key dimensions of the

bookrunner syndicate structure that we suggest can influence the quality of their service. We also

explain the possible impact of the financial crisis on the syndicate structure and quality

relationship.

2.1. Bookrunner syndicate size

The impact of the number of financial intermediaries on the quality of service to capital markets

issuers has been debated for a number of years. Kessel (1971) finds that the search benefits from

a larger number of bookrunners results in lower at-issue credit spreads. Corwin and Schultz

(2005) and Andres et al. (2014) find similar results for equity IPOs and high yield bonds

respectively. Alternatively, as bookrunner syndicates grow the degree of coordination required

increases and the resulting free-rider problems within the bookrunner syndicate also increase

(Diamond, 1996; Shivdasani and Song, 2011). We therefore propose the following competing

hypotheses:

H1a: There is a positive relation between bookrunner syndicate size and quality of service.

H1b: There is a negative relation between bookrunner syndicate size and quality of service.

2.2. Allocation of bookrunner responsibilities

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The certification bookrunner role entails both legal and reputational risks for intermediaries. The

certification role includes the negotiation of the bond tranche terms and conditions in the bond

documentation and the due diligence performed on the issuer. A bond’s legal documentation

does not distinguish between active and passive bookrunners and any losses incurred by

investors through insufficient due diligence is the responsibility of the entire syndicate.

Therefore a similar degree of commitment to the certification role is required for both active and

passive bookrunners. Given that this work is performed independently by each bookrunner,

coordination risks are largely absent from certification. The more bookrunners that perform this

role the greater the certification benefits offered to the issuer.

The placement role is managed jointly and exclusively by the active bookrunners. It is

therefore common for active bookrunners to receive a relatively larger share of the overall fees

of a bond tranche.4 Placement incorporates pre-announcement strategic discussions, marketing,

managing of the order book, and price setting. As the number of bookrunners increases

placement becomes increasingly difficult to coordinate. Free-rider incentives increase as each

active bookrunners’ contribution becomes more difficult to assess for the issuer.

Following these arguments, we expect that bookrunner certification is unrelated to the

allocation of roles between active and passive bookrunners. Issuers receive stronger certification

as they add more bookrunners to the syndicate, irrespective of whether they perform an active or

passive role. Focusing on the placement role, we expect that increasing the number of active

bookrunners in the syndicate leads to the same trade-off between search benefits from larger

syndicates against coordination difficulties and free-rider incentives amongst a larger number of

active bookrunners. Therefore, we propose the following competing hypotheses:

4 For Verizon Wireless’ USD 49bn multi-tranche bond issue priced in September 2013, the firm paid four active

bookrunners combined fees of $166.57m and seven passive bookrunners total fees of $89.1m (O’Malley, 2015).

9

H2a: There is a positive relation between active bookrunner use and quality of service.

H2b: There is a negative relation between active bookrunner use and quality of service.

Holding the size of the bookrunner syndicate constant, we also expect that the inclusion

of passive bookrunners in the syndicate limits the scope for coordination costs associated with a

higher number of active bookrunners. Issuing firms retain the certification benefits from a larger

bookrunner group without incurring the free-rider and coordination problems inherent in larger

syndicates comprised by active bookrunners (Shivdasani and Song, 2011). Therefore we expect

that the appointment of a passive bookrunner leads to an improvement in quality of placement

services. We propose that:

H3: There is a positive relation between passive bookrunner use and quality of service.

2.3. Bookrunner reputation

Classic product market models suggest that a producer’s reputation is positively related to the

quality of its goods (Allen, 1984). Chemmanur and Fulghieri (1994) adapt this model to the

reputation of bookrunners for equity offerings, arguing that higher reputation bookrunners offer

higher quality services and allow the issuing firm to sell shares at a higher price. However

empirical support for this prediction has been mixed in the equity markets (e.g. Logue et al.,

2002).

Fang (2005) argues that the bookrunner reputation theory is more likely to hold in bond

markets due to the frequency of bond market issuance and the greater relative bargaining

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position of bond issuing firms as these are larger and more established firms. We also suggest

that in contrast to the equity market (Slovin et al., 2000) the underwriting risks taken by bond

bookrunners is negligible.5 Underwriting risk is restricted to an investor cancelling the order in

the period between the public bookbuilding and the actual delivery of the bonds to investors, a

period typically lasting five business days (Standard and Poor’s, 2013). As such, the main

reputational risk for bookrunners is through insufficient investor interest in the bond tranche. In

practice this is a rare occurrence given the sophistication of the typical investor and the relative

stability of most issuers. Reputational damage can occur if the order book built up before the

bond is priced is less than the target amount communicated to the market. This could result in an

issue being downsized or withdrawn, which would have a negative impact for both active and

passive bookrunners since both are highlighted in external communication on the tranche and

both would be associated with the failed offering.

Chemmanur and Krishnan’s (2012) market power hypothesis suggests a negative relation

between bookrunner reputation and quality of service. In this theory, the impact of reputation on

quality is weak amongst financial intermediaries as their reputation is established largely through

their long-term relationships with investors, and not simply the quality of their service. High

reputation bookrunners are incentivized to reduce the quality of their services and exploit their

existing network of bond investors to ensure successful placement.

Empirical studies have produced mixed findings on the relation between bookrunner

reputation and quality of service in the bond market. Fang (2005) finds support for the reputation

hypothesis as tranches led by high reputation bookrunners have lower at-issue credit spreads.

Andres et al. (2014) find support for the market power hypothesis in a sample of high yield bond

5 In practice issues are normally sold on a best efforts basis requiring that bookrunners only commit to purchasing

the securities after they have engaged in public bookbuilding. During this process investor orders are taken, a

clearing price is determined and the bonds are allocated to investors.

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issues as those led by high reputation banks have higher at-issue credit spreads, which they

suggest reflects changes to high reputation bookrunners’ incentives following the repeal of the

Glass-Steagall Act. This resulted in growth in bookrunner competition leading to reduced

bookrunner fees resulting in the premium fee for offering higher quality services reducing

(Shivdasani and Song, 2011).

Given the conflicting reputation and market power arguments we propose the following

alternative hypothesis for the relation between bookrunner reputation and the quality of their

service:

H4a: There is a positive relation between bookrunner reputation and quality of service.

H4b: There is a negative relation between bookrunner reputation and quality of service.

2.4. Bookrunner geography

There is little research on how the geographic location of bookrunners relative to the issuing firm

impacts on the quality of the intermediary service. However loan market studies do show that

banks with stronger client relationships offer higher quality services. Fama (1985) emphasizes

the role that relationship banks can play in generating information on borrowing firms. Puri

(1996) finds that investors paid higher prices for securities underwritten by commercial banks

rather than investment houses, which is attributed to this certification role. Also Datta et al.

(1999) find that credit spreads on bond initial public offerings are negatively related to the

strength of the issuing firm’s banking relationships.

As we examine bond issues across a number of European Union countries we can

differentiate between domestic or non-domestic bookrunners based on the country where the

12

issuer and bookrunner are headquartered. We expect that domestic banks will enjoy stronger

relationships with issuing firms through previous provision of retail and investment banking

services and therefore offer a higher quality certification service. Differences in culture and

language within the European Union can lead to higher information asymmetries for non-

domestic bookrunners, reducing their ability to carry out the screening and due diligence

required for this role.

On the other hand, given a degree of information immobility across European borders,

hiring non-domestic bookrunners can improve the quality of the placement service and the

resulting pricing of bond tranches. Massa and Zalkodas (2014) find that US firms with access to

both the domestic and international bond markets tend to issue in international markets resulting

in lower at-issue credit spreads. They argue that international bond investors are able to offer

competitive pricing due to the portfolio benefits they obtain through diversifying away from

domestic firms. These search benefits could overcome the known home bias in financial analyst

forecasts and investor asset allocations (Bae et al., 2008). However we expect that the search

benefit from using non-domestic bookrunners is limited for our sample bond tranches given the

size and international stature of the issuing firms.

Therefore we suggest that the decision to use domestic or non-domestic bookrunners is

determined by a trade-off between the expected higher quality of certification offered by

domestic bookrunners against potentially greater search and resulting placement benefits through

using non-domestic bookrunners. This leads us to the following competing hypotheses on the

geographic location of intermediaries in the bookrunner syndicate:

13

H5a: There is a negative relation between non-domestic bookrunner use and quality of

service.

H5b: There is a positive relation between non-domestic bookrunner use and quality of

service.

2.5. Impact of the global financial crisis

In this section we develop hypotheses relating to the impact of the global financial crisis on the

relation between bookrunner syndicate structure and the quality of financial intermediary service.

Practitioner reports and the financial press suggest that the financial crisis led to significant

changes in the structure of bookrunner syndicates in the bond market. At the same time, credit

spreads increased during the financial crisis and subsequent European sovereign debt crisis. One

of our motivations for this study was that following the crisis, banks have sought to increase fee

income through ancillary business generated from banking clients including in the bond market

(Stothard, 2013). This has led to a growth in bookrunner syndicate sizes and issuing firms have

responded by adopting an active and passive bookrunner distinction with greater frequency

(Eurofi, 2014; Chivukula et al., 2014).

Shivdasani and Song (2011) argue that investor’s incentives to collect additional

information to evaluate securities are stronger during a recession, which reduces the importance

of bookrunner certification. As the euro-denominated bond market matures over time from its

formation in 1999 and issuing firms and their in-house advisors become more established in the

market this can further reduce the importance of the certification function of bookrunner

syndicates in the post-crisis time period. If this is the case, we expect that our previous

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hypotheses for the relation between bookrunner syndicates and quality of intermediary service

are stronger in the pre-crisis period.

Alternatively, given the low risk securities in our sample investors can be expected to

place little importance on underwriter certification in the pre-crisis period. We argue that the

post-crisis period is characterized by greater information asymmetries between issuers and

investors and a reduced trust in the credit ratings assigned to issuing firms. We expect that

investors will place greater importance on the screening and due diligence carried out by

financial intermediaries in the certification process for sample securities during this later time

period. If this is the case, we expect that our previous hypotheses on the relation between

bookrunner syndicates and quality of service are stronger in the post-crisis period.

Given these alternative explanations for the relation between bookrunner syndicate

structure and at-issue credit spreads, we propose the following competing hypotheses:

H6a: The relation between bookrunner syndicate structure and quality of service is driven

by the pre-crisis period.

H6b: The relation between bookrunner syndicate structure and quality of service is driven

by the post-crisis period.

3. Sample construction, dependent variable and empirical determinants

In this section we set out the sample selection process, our dependent variable of the quality of

bookrunner services, and the proxies for the bookrunner syndicate characteristics (our

explanatory variables). An overview of the sources and calculations for each of the empirical

determinants can be found in Table 1.

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[Insert Table 1 about here]

3.1. Sample construction

Our sample is based on a Dealogic Debt Capital Markets Analytics search of all euro-

denominated senior unsecured bond tranches by Western European corporates from January 1,

2001 up to December 31, 2012.6 We exclude tranches issued by financial institutions

7 and

secured tranches due to their distinct credit risk profile.8 We include only tranches that are fully

distributed. We also exclude tranches that Dealogic identifies as non-investment grade from the

sample since the price of such tranches is best measured by an at-issue yield rather than a spread

given their equity-like features (Blume et al., 1991).9

In order to focus on tranches that have been marketed to a wide syndicate of European

investors we filter out tranches that are domestically placed, privately placed, single bookrunner-

led, retail-targeted, smaller than EUR 200m, fungible10

, and with a maturity of less than 1 year.

Such tranches will have been sold to a small subset of European investors and are therefore

expected to have cleared at different and less competitive at-issue credit spreads (Blackwell and

Kidwell, 1988; Massa and Zalkodas, 2014). Moreover lower transaction costs incurred through

private placements would imply lower credit spread sensitivity for issuers using this format

6 Dealogic defines Western Europe as including Austria, Belgium, France, Germany, Greece, Ireland, Luxembourg,

Netherlands, Portugal, Spain, Switzerland and UK. 7 The sample does include captive finance firms whose main line of business is to provide lending services to

customers of their industrial parent. Examples include Volkswagen Financial Services and Renault Credit

International Banque. 8 Stulz and Johnson (1985) note that the value of secured debt is largely linked to the value of the collateral assigned

to the bond as opposed to the overall credit worthiness of the firm. 9 In practice a small number of unrated tranches remains in our sample. Dealogic classifies these tranches as

investment grade where the issuer is unrated and no covenants are identified for the tranche. These tranches have the

characteristics of investment grade securities even though the issuer and security are unrated. 10

These are typically known as taps. They have the same terms and conditions as one of an issuer’s existing bonds

and effectively result in an increase in the outstanding amount of this bond. Taps tend to be sold to a small number

of existing holders in the bond.

16

(Blackwell and Kidwell, 1988). These filters produce a final sample of 1,224 bond tranches

issued by 324 firms and we report summary statistics for these tranches in Table 2.

[Insert Table 2 about here]

3.2. Dependent variable - measuring the quality of bookrunner services

The literature on the quality of financial intermediary services typically uses the price of the

asset intermediated as a proxy for quality. The bond literature shows that issuers consider ex ante

observable firm and tranche characteristics related to the risk of default when selecting the

optimal structure of their bookrunner syndicate (Longstaff et al., 2005).11

We measure the quality

of bookrunner services through the at-issue credit spread on bond tranches relative to the

benchmark midswap rate, which is an inverse measure of the price obtained. The at-issue credit

spread is widely quoted in key trade publications including Thomson Reuters’ International

Financing Review (IFR) and Euromoney Institutional Investors’ GlobalCapital as a measure of

issue quality in the bond market.12

In the European bond market the appropriate at-issue credit spread is the spread over the

euro mid-swap rate, which is equivalent to the market’s expectations of the return generated

through the Euribor interbank market over the same tenor. The euro mid-swap rate is an actively

11

Alternative proxies for bookrunner quality can include fees and tranche characteristics including size and tenor.

However, tranche size and tenor are difficult to interpret as measures of issue quality without an understanding of

issuer’s optimal preferences. Moreover, fee information is not required to be reported for tranches sold into Europe

and is unavailable for our sample. Fee details are also likely to be uninformative for our sample tranches because

bond market fees are typically negotiated in advance and are more closely linked to borrower and tranche

parameters such as credit quality and tenor (Melnik and Nissim, 2003). From our discussion with practitioners they

suggest that for plain vanilla bond tranches, bookrunner fees are typically offered on a take it or leave it basis,

meaning no differentiation according to quality of bookrunner service provided. 12

For example, in an article “Blue chips thrive as EDF takes EUR 2bn, Daimler goes to 10 years,” GlobalCapital,

September 4, 2012 is quoted as describing the French utility as having “...sold a EUR 2bn 10 year bond in January

[2012] that had a 3.875% coupon and was priced at 168.6bp over mid-swaps.”

17

traded contract where the purchaser receives 6 month Euribor for a specified period of time. The

euro mid-swap is used for pricing primary euro-denominated corporate bond offerings, as there

is no uniform government bond across the Eurozone.

For our sample of bond tranches we collect the at-issue credit spread in the first instance

from Dealogic, which has records of the pricing details for most of its bonds obtained directly

from the final term sheets of each tranche. For the fixed rate tranches where Dealogic did not

record an at-issue credit spread we calculate this manually through retrieving the at-issue yield to

maturity from the bond prospectus and deducting the benchmark midswap rate as of the date of

issuance. The spread over midswap is not available for the 101 floating rate note tranches in our

sample as they are typically priced over 3 month Euribor, whereas the euro midswap is based on

market expectations of the 6 month Euribor. For these tranches we approximate the spread over

midswap by manually replacing their 3 month Euribor based credit spread with a 6 month

spread. We convert by adding the applicable 6v3 basis swap spread to their at-issue spread over

3 month Euribor. As historic data on this swap is only available from January 2004 we can apply

this calculation to 71 out of the 101 floating rate tranches. Following these additional exclusions,

at-issue credit spread is available for 1,194 tranches.

For these tranches, the mean (median) at-issue credit spread is 1.370% (0.960%). Despite

our sample period covering the global financial crisis, the mean figure is comparable to the

1.35% treasury spread reported by Fang (2005) for her subsample of issues underwritten by high

reputation bookrunners. As would be expected it is noticeably lower than the 4.97% spread for

high yield bonds reported by Andres et al. (2014) between 2000 and 2008.

3.3. Empirical determinants of quality - bookrunner syndicate structure

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3.3.1. Bookrunner syndicate size

The number of bookrunners is a count of each individual bank appointed to any bookrunner role

in a bond tranche offering. Dealogic extract this information from the final term sheets on each

tranche. In cases where the Dealogic data is incomplete, we collect these details from the

relevant bond prospectus. As reported in Table 2 the sample mean (median) number of

bookrunners is 4.074 (4.000), which is considerably higher than reported in earlier studies.

Andres et al. (2014) record an average of 3.13 bookrunners in their sample of high yield

tranches, and Shivdasani and Song (2011) find that only 12.3% of their sample of corporate bond

issues is intermediated by 4 or more bookrunners. The larger syndicate size reflects the criteria of

tranches using at least 2 bookrunners, our focus on non-domestically placed bonds, the trend of

increasing bookrunner syndicates over time, and larger tranches require more bookrunners for

effective distribution.

3.3.2. Bookrunner active-passive role split

We split the total bookrunner syndicate between active and passive bookrunners. Information on

the involvement of each bookrunner is obtained through searching press coverage of each

tranche published in IFR and GlobalCapital. News sources make clear distinctions between those

banks with active and passive roles on each tranche. This information is sourced from the

communication distributed by active bookrunners during the marketing phase of the syndication

process.13

Tranches in our sample have an average of 3.680 active bookrunners and 8.40% of the

sample tranches have at least one passive bookrunner. In our empirical testing we focus on the

13

It is important for active bookrunners to make this distinction. As only the active bookrunners take responsibility

for the placement role, only their bond sales force is required to actively market and source orders for the tranche.

19

number of active bookrunners in the syndicate and a dummy variable for those tranches that

appoint at least one passive bookrunner to the syndicate.

3.3.3. Bookrunner reputation

Following prior bookrunner studies we use league table rankings to proxy for bookrunner

reputation (Fang, 2005; Golubov et al., 2012). In Table 3 we firstly construct a sample-specific

league table for all bookrunners and, secondly solely for active bookrunners. To create these

league tables we mimic Bloomberg and Dealscan league table methods in assigning league table

credits equally across the bookrunner syndicate for each trade; either the full syndicate or only

the active bookrunners.14

[Insert Table 3 about here]

The main publishers of European bond league tables, namely Dealogic and IFR, publish

rankings focused almost exclusively on the Top 10 and therefore we focus on this benchmark to

classify our sample bookrunners as top tier. We define high reputation bookrunners as those in

the Top 10 of our league tables. The Top 10 banks in both the overall and active role league

tables are dominated by French, German, UK, and US banks. We measure bookrunner syndicate

reputation as the percentage of the total bookrunner syndicate and active bookrunner group on a

14

One difference in our method and Bloomberg and Dealscan is in the treatment of mergers and acquisitions

amongst competing bookrunners. To avoid artificially inflating the reputation of smaller banks we do not

retrospectively assign bookrunner credits from the target bank to the acquiring bank. For instance, in the case of

RBS’ take-over of ABN AMRO’s investment banking division in 2007, RBS does not obtain league table credits for

ABN AMRO’s earlier led transactions.

20

tranche that is part of the Top 10. On average, Top 10 bookrunners constitute 62.0% of the total

bookrunners and 63.0% of the active bookrunners on a tranche.15

3.3.4. Bookrunner geography

To measure the role of bookrunner geography in the quality of bookrunner service we examine

the proportion of non-domestic bookrunners in the syndicate, (domicile is based on the country

of incorporation of the issuer and the bookrunner). Following our method for league table

rankings we focus on the bookrunner syndicate at the time of issue and do not retrospectively

account for the effects of mergers amongst bookrunners.16

Non-domestic bookrunners account

for 65.9% of total bookrunner syndicate for our sample and this ratio is almost identical to the

fraction of non-domestic active bookrunners. To consider the relative influence of geography and

reputational effects we construct a proxy for the number of non-domestic Top 10 active

bookrunners on a tranche. 43.7% of active bookrunners are classified as both non-domestic and

high reputation.

4. Construction of empirical tests

4.1. Model specification

Previous studies have found that the propensity to appoint top tier bookrunners is determined by

issuer and tranche parameters that also influence credit spreads (Gande et al., 1999; Puri, 1996).

Therefore, we use two-stage instrumental variable regressions that account for endogeneity in the

matching between issuers and bookrunners. Our first stage regressions examine the determinants

15

At least one of the Top 10 bookrunners in our sample is involved in 96.1% of tranches. The near-uniform presence

of a Top 10 bookrunner means an indicator variable for using a top tier bank, as used most commonly in prior

literature (Fang, 2005; Golubov et al., 2012), would be a meaningless proxy for reputation in our sample. 16

Again in the case of the RBS take-over of ABN AMRO, for the purpose of earlier ABN AMRO-led trades the

bank is seen as based in the Netherlands, i.e. it is not retrospectively seen as a UK bank.

21

of bookrunner syndicate structure, and second stage regressions examine the determinants of at-

issue credit spreads after-controlling for bookrunner-issuer matching in the first stage

specification. All regressions are estimated with standard errors clustered at the bond level.

4.2. Instrumental variables

To estimate these models we require at least one instrumental variable that appears only in the

first stage regressions. Such factors that are expected to influence the parameters of a bookrunner

syndicate but not the at-issue credit spread. Given our focus on a wide variety of bookrunner

syndicate parameters we use three instrumental variables that we expect are related to at least

one aspect of the structure of the investment banking syndicate. We use a Southern Europe

dummy, issue frequency, and a debut dummy.17

The Southern Europe dummy takes the value one if the issuer’s principal headquarters are

in Greece, Italy, Portugal or Spain, and zero otherwise. Southern European banks tend to be

smaller, reflecting these countries’ more fragmented banking systems and lower GDP per capita

levels (Cavalier, 2014). Holding constant the size of a borrowing firm’s funding and liquidity

requirements, Southern European issuers are expected to require a larger syndicate of

relationship banks to provide their required range of banking services. These banks can lobby for

bond bookrunner business, resulting in larger average bookrunner syndicates and a greater

likelihood of relegating some banks to a passive role. Table 3 also shows few high reputation

bookrunners are based in Southern Europe and so we expect a negative relation between

reputation and the Southern Europe dummy if these issuers are more likely to use domestic

17

Fang (2005) and Golubov et al. (2012) use a scope instrumental variable that ranks lead underwriters’ prior

experience advising or underwriting transactions for the issuing firm in the M&A, equity, and bond markets. A

higher score implies a strong prior relationship between the investment bank and the issuing firm and increases the

likelihood of appointing a top tier investment bank. Given the absence of a lead bookrunner for our sample and the

resulting focus on the overall bookrunner syndicate, this instrument is less informative in our analysis.

22

bookrunners. To compensate for this, Southern European issuers can use more non-domestic

banks to increase investor search benefits.

Issue frequency is a count of the number of euro-denominated tranches issued by a firm

during the sample period. Frequent bond issuers are expected to have dedicated in-house bond

issuance expertise, are more likely to build relationships with reputable banks, and hence require

smaller bookrunner syndicates (Fang, 2005). Moreover, frequent issuers are expected to be better

known by the major bond investors, which reduce the potential placement benefits from hiring

non-domestic bookrunners.

The debut dummy takes the value of one if the tranche is the company’s first appearance

in the euro-denominated bond market, and zero otherwise. We construct this variable for an

extended sample starting in 1999; the first year of bond issues in the euro-denominated market.18

If the first transaction is multi-tranche, all tranches are labelled as debut. Prior research shows

that debut bond issuers are likely to be smaller firms and are more likely to appoint their

relationship banks to bookrunner roles (Yasuda, 2005). This suggests that bookrunner syndicates

on debut tranches will be smaller and have a lower proportion of non-domestic banks.

4.3. Control variables

We control for a range of other firm- and tranche-specific variables that prior studies have found

to influence the at-issue credit spread and the choice of bookrunner parameters. The firm

characteristics we use are size, profitability, the level of intangible assets, leverage, growth

opportunities and public ownership.19

For our sample of investment grade firms the average

issuer has EUR 57.89bn of assets, a book leverage ratio of 34.1% and generates operating profit

18

Issuance and data availability in the euro-denominated bond market is limited and incomplete prior to 2002. 19

See Fang (2005) and Shivdasani and Song (2011) for a comprehensive summary of these variables.

23

of 14.8% of total assets. 13.8% of our sample firms have majority government ownership. Credit

spreads for such firms are expected to be lower due to government regulation and expected

government support in cases of financial distress (Standard and Poor’s, 2010). Collectively, these

summary statistics show that our sample firms are very large and low credit risk issuers.

The tranche-specific parameters we use are the credit rating, maturity, tranche size and

whether the tranche is part of a multi-tranche offering.20

The credit rating is expected to have a

substantial influence on the credit spread, being a key proxy of default risk. It is measured as a

numeric scale of the S&P tranche rating, ascending from 1 for AAA to 10 for BBB- and 11 for

unrated tranches. The sample mean of 7.239 lies between an A- and a BBB+. The mean tranche

tenor is 7.3 years and size is EUR 0.816bn. Both are in line with benchmark index standards.21

29.6% of our sample tranches are part of multi-tranches offers.

5. Empirical analysis

5.1. Determinants of bookrunner syndicate structure

In this section we report the findings of the first stage regressions of bookrunner syndicate

structure. The determinants of syndicate size characteristics are presented in Table 4. Model 1

presents the determinants of the number of bookrunners in the syndicate. All three instrumental

bookrunner characteristics are statistically significant. Issuers from Southern Europe tend to

appoint more bookrunners, and debut and frequent issuers appoint fewer bookrunners. We expect

Southern European issuers to appoint larger bookrunner syndicates given the smaller size of their

domestic banking system and the limited ability of domestic banks to distribute large-scale

20

See Asquith et al. (2013), Collin-Dufresne et al. (2001), Elton et al. (2001), and Longstaff et al. (2005) for a

comprehensive summary of these variables. 21

The iBoxx index requires a EUR 0.5bn minimum issue size for inclusion and includes a 5-7 year index as well as

a 7-10 year index.

24

offerings. Frequent issuers are expected to have dedicated in-house advisory groups and the

issuer’s reputation in the market reduces the need for larger bookrunner syndicates. Our finding

that debut issuers use smaller bookrunner syndicates is consistent with Yasuda (2005), who finds

that debut issuers are more likely to use a smaller pool of existing relationship banks to

underwrite their debut issue. For our control variables, the number of total bookrunners is also

positively related to our credit rating scale, where we assign low values to tranches with the

strongest credit ratings, suggesting that weaker rated firms appoint more bookrunners to ensure

distribution of their bonds. Syndicate size is negatively related to the dummy for majority

government ownership, suggesting that public ownership reduces the need for a large

bookrunner syndicate to ensure distribution of tranches. Unsurprisingly, larger and more

complex multi-tranche offerings require larger bookrunner syndicate groups.

[Insert Table 4 about here]

The determinants of the number of active bookrunners shown in Model 2 are largely

similar to the determinants of the number of total bookrunners in Model 1. The main differences

are that the debut dummy is not statistically significant. The lack of statistical significance for the

debut dummy suggests that although debut firms tend to have smaller overall bookrunner

syndicates, they appoint a comparable number of active bookrunners given the greater degree of

support in placement activities they could require. Again, our credit rating measure, tranche size,

and the multi-tranche dummy are positively related to the number of active bookrunners in the

syndicate. We also now find that firm size and leverage are positively related to the number of

25

active bookrunners, which again is likely to reflect the number of banking relationships, issue

size and complexity, and perceived riskiness of these issuing firms.

Model 3 presents the results for a first stage Heckman (1979) probit model where the

dependent variable is a dummy set equal to one for those bookrunner syndicates using a passive

bookrunner, and zero otherwise. We find that Southern European firms are more likely to

appoint passive bookrunners. We expect that such issuers face the greatest pressure to appoint

more bookrunners because they engage with larger numbers of domestic relationship banks in

the fragmented Southern European banking market. To maintain these banking relationships,

issuing firms are required to reward this greater number of banks with bond market business.

Firms issuing in larger amounts and multi-tranche offerings are also more likely to appoint

passive bookrunners, suggesting these issuers require greater certification from a larger number

bookrunners, but use passive bookrunners to limit the coordination and free rider problems

inherent in larger active bookrunner syndicates.

We extend our analysis of syndicate structure in Table 5 to consider the determinants of

bookrunner syndicate reputation and the geographical split between domestic and non-domestic

bookrunners. Models 1 and 2 examine the determinants of the proportion of total and active

bookrunners that are classified as high reputation banks respectively. We find that Southern

European firms appoint significantly fewer Top 10 bookrunners, likely reflecting the relatively

lower league table ranking of their domestic relationship banks. We also find that debut firms are

likely to have a lower proportion of Top 10 bookrunners. This can reflect a preference for

domestic banks regardless of league table position, which is consistent with Yasuda’s (2005)

finding that debut issuers are more likely to use a small pool of existing relationship banks to

underwrite their debut issue. It is also consistent with debut issues being smaller and less

26

complex, hence placing less emphasis on the reputation benefits of Top 10 bookrunners. For our

control variables, we find that larger and longer maturity tranches are more likely to involve the

appointment of high reputation bookrunners, likely reflecting the need to use high reputation

banks with a larger distribution network to raise larger amounts of capital at longer maturities.

Fang (2005) finds similar results for her sample of US bond issues. Also profitable firms use

higher reputation bookrunners, suggesting that high reputation intermediaries are less likely to be

associated with relatively poorer performing firms.

[Insert Table 5 about here]

Models 3 to 5 examine the proportion of non-domestic bookrunners appointed to a

tranche. Model 3 examines the proportion of non-domestic bookrunners and models 4 and 5

examine the proportion of non-domestic active bookrunners and the proportion of non-domestic

active Top 10 bookrunners in the syndicate respectively. We find that non-domestic bookrunners

are more likely to be appointed by Southern European firms and less likely to be mandated by

frequent and debut issuers. The results for Southern European issuers reflect the smaller size of

their local relationship banks, and hence greater need to appoint non-domestic banks to distribute

their bond offerings. The results for frequency are somewhat surprising as one would expect

frequent borrowers to have more sizeable funding needs and hence more likely to develop

relationships with non-domestic banks. The opposite relationship likely reflects that many

frequent issuers in the euro-denominated corporate bond markets have partial government stakes

or that frequent issuers issue off standardized terms and documentation, over a short arrangement

period, and place less reliance on the search benefits of non-domestic bookrunners. The result for

27

debut is consistent with our view that such firms are smaller and more likely to have smaller

relationship banking syndicates and be dominated by domestic banks. For our control variables,

we find a lower propensity for majority government-owned firms to appoint non-domestic active

bookrunners, suggesting these issuers can face political pressure around the domicile of their

financial intermediaries. Larger and unprofitable firms and multi-tranche issues are more likely

to appoint non-domestic bookrunners, suggesting a greater need by these issuers to attract a

wider investor base for their offerings. Highly rated tranches are also more likely to appointment

of non-domestic bookrunners, consistent with reputation concerns where non-domestic banks are

unwilling to manage the order book for higher risk bonds for issuing firms when information

asymmetries are higher.

5.2. The impact of bookrunner syndicate structure on quality of service

In this section we present the results for our second stage regressions of the determinants of at-

issue credit spreads. The models presented are derived from the first stage models examining the

determinants of bookrunner syndicate structure presented in Tables 4 and 5.

After controlling for issuer-bookrunner syndicate matching, we find in Model 1 that

bookrunner syndicate size is positively related to at-issue credit spread (p=0.018). This confirms

Hypothesis 1b that larger bookrunner syndicates perform lower quality services. This finding is

consistent with agency theory predictions on larger syndicates of financial intermediaries

(Diamond, 1996). It also suggests that the growth in bookrunner syndicates in Europe over the

2000s has resulted in similar coordination and free-rider conflicts following the repeal of the

Glass-Steagall Act in the US a decade earlier (Shivdasani and Song 2011).

28

[Insert Table 6 about here]

Model 2 examines the impact of the number of active bookrunners on the quality of

service. Consistent with Hypothesis 2b, the number of active bookrunners is positively related to

the at-issue credit spread (p=0.022) (lower quality). This supports our findings for overall

syndicate size and shows that larger active bookrunner syndicates are associated with lower

quality intermediary services given the coordination costs and free-rider incentives within the

placement function.

Model 3 examines the effect of passive bookrunners on the at-issue credit spread.

Consistent with Hypothesis 3, the passive bookrunner Mills ratio is negatively related to at-issue

credit spreads (p=0.046). This confirms that the decision to use a passive bookrunner reduces the

at-issue credit spread, suggesting an improvement in the quality of underwriting service. We

argue that passive bookrunners can reduce the coordination and free-riding problems inherent in

larger bookrunner groups by using passive bookrunners. These banks perform a due diligence

role independent of other bookrunners in the syndicate that allows the issuing firm to benefit

from certification. They do not contribute to the distribution of the bond tranche where free-rider

costs within the group structure are associated with a reduction in the quality of underwriting

service (Shivdasani and Song, 2011).

For our control variables we find that across models 1 to 3, low profitability and high

leverage firms have higher at-issue credit spreads, suggesting that bond investors consider these

are important firm-level measures of tranche risk. As expected, we find a positive relation

between our credit rating and at-issue spreads. Multi-tranche offerings and issues by firms with

higher market-to-book ratios have lower at-issue credit spreads. Multi-tranches offers are

29

expected to be used by larger and less risky issuers and we expect that market-to-book reflects

the bond market’s perception of investment opportunities for the tranche proceeds. We find weak

evidence in model 2 that larger issuers have lower at-issue spreads, but the result is not robust in

the remaining models.

Collectively, our results on the active-passive split provide new and robust support for the

agency perspective on syndicates of financial intermediaries (Diamond, 1996). Larger syndicates

of bookrunners actively involved with the selling of a tranche are associated with a lower quality

of service. However issuers who elect to relegate at least one of these intermediaries to passive

roles receive higher quality of service from their bookrunner syndicate in the form of improved

pricing for their bond tranche. We attribute this effect to a reduction in coordination problems

and the resulting scope for free-riding amongst the active bookrunners.

In Table 7 we examine the effects of bookrunner reputation and geographic proximity on

the quality of service. Model 1 studies the impact of the proportion of total bookrunners that are

classified as Top 10 on the at-issue credit spread. Consistent with Hypothesis 4a, the proportion

of Top 10 bookrunners is negatively related to at-issue credit spreads (p=0.025). This is

consistent with reputational benefits incentivizing top tier bookrunners to perform higher quality

services (Chemmanur and Fulghieri, 1994; Fang, 2005). Although potentially appealing for high

yield bond issues we expect the market power hypothesis is less likely to explain the behavior for

our sample of European investment grade issuers. The market is dominated by large and well

established borrowers and higher reputation bookrunners are therefore incentivized to perform

high quality services for these issuers as they envisage repeat business in the future.

Model 2 examines the proportion of Top 10 active bookrunners. We find bookrunner

reputation is also negatively related to credit spreads (p=0.048), confirming reputational

30

incentives hold for both the certification and the placement workstreams. Both models therefore

support Hypothesis 4a and the theory that high reputation bookrunners provide higher quality of

intermediary services. This complements and extends the earlier findings for lead investment

bank reputation in the bond market by Fang (2005) and in M&A advisory roles by Golubov et al.

(2012).22

[Insert Table 7 about here]

In models 3 to 5 of Table 7 we test Hypotheses 5a and 5b and examine the impact of

bookrunner geographic proximity on at-issue credit spread. In model 3 we find that the

proportion of non-domestic bookrunners is positive and weakly significant to at-issue credit

spreads (p=0.083). This provides some support for the previously untested theory that non-

domestic banks offer lower quality bookrunner services. More generally, it is consistent with the

prediction that strong banking relationships can provide valuable certification for issuing firms in

debt markets (Datta et al. 1999; Drucker and Puri, 2005).23

In model 4 we examine the proportion of non-domestic active bookrunners. This is

positively related to at-issue credit spreads (p=0.039) and suggests that the relationship benefits

22 We repeat this analysis of bookrunner reputation replacing the proportion of Top 10 bookrunners with the average

bookrunner ranking for the overall syndicate and for the group of active bookrunners. A higher value for average

bookrunner ranking implies a great fraction of lower reputation bookrunners in the syndicate. We find that this

variable is positively related to the at-issue credit spread and the coefficient is significant at the 5% level in both

regression models. This confirms the robustness of our earlier findings and suggests that the lower the average

league table position of the bookrunner syndicate, the weaker their ability to deliver the best pricing for the issuer. 23

In further testing we also examine the impact of non-domestic bookrunners located in the largest three European

economies; namely France, Germany and the UK. Analyzing the make-up of the non-domestic active bookrunner

syndicate, we find that around half, are from Germany, France or the United Kingdom. Bookrunners domiciled in

these countries should offer the most meaningful search benefits through providing access to investors in the main

domiciles for European capital markets. We again find a positive relation between the proportion of non-domestic

bookrunners headquartered in these economies and the at-issue credit spread, suggesting that relationship

mechanisms implied by geographic proximity between issuers firms and bookrunner syndicates outweigh search

benefits through hiring bookrunner from Europe’s largest capital markets.

31

of using domestic bookrunners continue to apply when only considering active bookrunners who

are able to offer search benefits to the issuer (Kessel, 1971).

The final model considers the influence of bookrunner geographic proximity when

measured against bookrunner reputation. Model 5 examines the proportion of non-domestic

active bookrunners that are part of the Top 10 league table, and so are expected to perform high

quality services due to reputational incentives. We find a positive and significant relation

between this measure of bookrunner geography and at-issue credit spreads (p=0.022). This

suggests that irrespective of whether a non-domestic bank is a high reputation bookrunner, an

issuer receives higher quality service from a domestic bookrunner.24

Collectively, these findings

support Hypothesis 5a that using a higher proportion of non-domestic bookrunners is associated

with a lower quality of intermediary services.

Consistent with our earlier findings reported in Table 6, for the control variables we find

that lower rated bond tranches are priced at higher at-issue credit spreads and in most cases that

profitability and growth opportunities are negatively related to spreads. The positive relation

from leverage and spreads and the negative relation between multi-tranche issues and credit

spreads is weaker in Table 7. We also find a negative relation between issuer size and spreads,

suggesting that larger and therefore lower risk firms achieve lower credit spreads on their bond

tranches. Larger tranches command higher at-issue spreads suggesting that investors require

compensation in the form of higher returns for purchasing larger issues.

24

In addition, we re-estimate our findings for the subsample of issuers who do not have a domestic Top 10

bookrunner in their bookrunner syndicate. If reputational effects are the primary drivers of bookrunner syndicate

selection, the benefit of a non-domestic top tier bookrunner are most acute for these issuers. For the overall sample,

629 tranches do not use a domestic Top 10 bookrunner. For these issuers, 65.9% of their active bookrunners are high

reputation non-domestic investment banks. Compared to the overall rate of 43.7%, this emphasizes that for firms

without a high reputation domestic investment bank to run their order book, there is a greater emphasis on

appointing non-domestic high reputation banks. We again find that the proportion of non-domestic active

bookrunners is positive for this subsample, although insignificant. This suggests that only those issuers whose best

domestic bank is not regarded as a high reputation bookrunner in reported league tables should be indifferent

between appointing a non-domestic high reputation bookrunner and a lower reputation domestic bookrunner.

32

Overall, Table 7 shows that high reputation bookrunners do offer high quality services,

on average, for the tranches where they form the majority of the bookrunner syndicate. However,

we also find that domestic bookrunners offer higher quality services than non-domestic

bookrunners, even when these non-domestic intermediaries are classified as high reputation

bookrunners. We speculate that the difference between top tier and non-top tier bookrunners

largely reflects top tier bookrunners being skilled at serving clients they have a strong business

relationship with, which will predominantly be their domestic client base.

5.3. Impact of the global financial crisis on bookrunner syndicates and at-issue credit spreads

In this section we examine the impact of the global financial crisis on the relation between

bookrunner syndicate structure and quality of service. To highlight the structural changes in the

euro-denominated bond market over the sample period, Figure 1 presents quarterly data on the

number of bond tranches issued and the average at issue-credit spread over our sample period.

Spreads decline initially and reach a minimum between 2003 and 2007 as banks compete with

bond investors to offer lower spreads for borrowing firms. As expected, we observe a sharp spike

in credit spreads in Q3 2008. Although spreads decline after this stage the average value remains

above the average credit-spread observed at any stage in the pre-crisis period. This reflects the

continued European sovereign debt crisis during the latter part of our sample period. This clear

demarcation point in the data supports a focus on two distinct pre- and post-crisis periods.

[Insert Figure 1 about here]

33

The first post-crisis year, 2009, is the year of record issuance in the euro-denominated

corporate debt market. This reflects companies diversifying away from bank and short-term

sources of finance following the financial crisis. We therefore conduct subsample tests for the

period before and after the recent global financial crisis. We take September 1, 2008 as the

starting date for the crisis period being the month of Lehman Brothers’ bankruptcy filing.

Panel A of Table 8 reports mean and median comparisons for bookrunner syndicates over

the pre- and post-crisis subsamples. Panel B reports this same data for instrumental and tranche

variables. It is clear that European corporate bond markets remained highly accessible for our

sample of well-established investment grade firms throughout the post-crisis period.

[Insert Table 8 about here]

Post-crisis, we find a significant increase in the size of bookrunner syndicates. The mean

(median) syndicate size increases from 3.211 (3.000) to 4.865 (4.000). The increase in syndicate

size results from both an increase in the number of active bookrunners and increased use of

passive bookrunners. We find limited evidence of an increase in the proportion of active Top 10

bookrunners, but otherwise no evidence of issuers using higher reputation bookrunners in the

post-crisis period. Focusing on geographical characteristics of the sample, we find no obvious

increase in the propensity to use non-domestic bookrunners, for the overall and active

bookrunner groups. The median proportion of high reputation bookrunners increases from 40%

to 50% in the post-crisis period and the difference is weakly significant at the 10% level.

For tranche characteristics, the mean (median) at-issue credit spread is 0.711% (0.600%)

in the pre-crisis period, which increases significantly in the post-crisis period to 1.946%

34

(1.600%). We find that firms issuing post-financial crisis issued less frequently over the entire

sample period. We expect that such firms switched out of bank financing and into the bond

market following the financial crisis. As expected given the variable definition, debut issuers are

less frequent in the latter time period. We find a reduction of one grade in the mean and median

credit rating from A- to BBB+ for tranches issued post-crisis, suggesting a reduction in the credit

quality of firms during the financial crisis period. Finally, we find a decline in the average, but

not the median, tranche size post-crisis and a reduction in the frequency of multi-tranche

offerings. With the exception of increased credit spread, these summary statistics for tranche

characteristics in Panel B offer no evidence of increased tranche size or complexity that would

necessitate the larger and more heterogeneous bookrunners syndicates found in Panel A.

We examine the role of the financial crisis on the relation between bookrunner syndicates

and at-issue credit spreads by estimating separate regressions for the pre- and post-crisis periods.

Table 9 repeats the tests in Table 6 for bookrunner syndicate size and the active-passive split

surrounding the financial crisis.25

Panel A reports results for the pre-financial period and Panel B

for the post-crisis period. The post-crisis coefficient for bookrunner syndicate size in model 1 is

positive and statistically significant (p=0.017). The post-crisis sample is characterized by larger

bookrunner syndicate sizes that are more likely to be affected by free-rider incentives in larger

groups. The bookrunner syndicate size coefficient in the pre-crisis period is insignificant. This

reflects that smaller and more homogeneous syndicates of intermediaries are less prone to

agency costs, meaning that firms are better able to trade off the marginal search benefits against

the free-rider agency costs of adding an additional bookrunner to the syndicate.

25

We report only the coefficients for bookrunner characteristics in the second stage regressions of at-issue credit

spread determinants. All first stage regressions and firm and tranche characteristics have been included in our

analysis but are omitted for brevity.

35

[Insert Table 9 about here]

The post-crisis results for bookrunner active-passive split, shown in models 2 and 3 of

Table 9, are statistically significant and in line with our main regressions. The number of active

bookrunners is positively related to at-issue credit spreads (p=0.020) and the passive bookrunner

Mills ratio is weakly significant and negatively related to at-issue spreads (p=0.093). This

finding is unsurprising since passive bookrunners are significantly less common in the period

prior to the financial crisis given the more manageable bookrunner syndicate sizes.26

In Table 10 we consider the impact of bookrunner reputation and geography on credit

spreads in the pre- and post-crisis periods. We find that the post-crisis results are weaker than for

the earlier tests in Table 7. For reputation in model 1 the proportion of Top 10 bookrunners is

weakly and negatively related to issue spreads (p=0.072) However, our measure of active

bookrunner reputation in model 2 is insignificant in the pre- and post-crisis period. This provides

limited evidence in support of the reputation hypothesis of Fang (2005) and generally supports

our finding for the full sample that bookrunner reputation is of secondary importance in the

pricing of bond tranches for our sample of investment grade issuers.

[Insert Table 10 about here]

Finally, the pre- and post-crisis results for bookrunner geography are also shown in Table

10 in models 3 to 5. The results are qualitatively in line with our earlier findings in Table 7. The

coefficients on the post-crisis results are all positive and statistically significant at the 10% level

26

We report the coefficient on the passive bookrunner Mills ratio for the pre-crisis period in Table 9 for

completeness, but note that meaningful interpretation of the variable is limited given the small number of our sample

bond tranches used a passive bookrunner prior to the financial crisis.

36

or better. The fact that these results are significant only for the post-crisis period suggests that the

growth in bookrunner syndicate sizes and resulting higher costs of communication and

information dissemination for the issuer increases the value of hiring a greater proportion of

domestic banks with lower information frictions. Alternative explanations based on post-

financial crisis changes in the frequency of using non-domestic bookrunner syndicate appear

unconvincing. Table 8 highlights that the overall proportion of non-domestic bookrunners, active

or otherwise, has not changed significantly from pre- to post-crisis.

Collectively, we find that post-financial crisis tranches drive our earlier findings on the

relation between bookrunner syndicate structure and quality of service for our sample of

investment grade bond tranches issued by large European firms. This provides support for

Hypothesis 6b. Our findings reflect the post-crisis structural trends in bookrunner syndicates

highlighted in Table 8, most notably larger bookrunner syndicate sizes and increased use of

passive bookrunner roles. Prior to the financial crisis bookrunner syndicate structure is unrelated

to the pricing of our sample of low risk bond tranches. However, these structural trends have and

continue to impact the corporate bond markets and are hence relevant for bond issuers.

Moreover, our results suggest that the relative importance of the certification and placement role

of financial intermediaries in the bond market varies with financial market conditions. The

heterogeneity of the at-issue spread primarily began in the years following the financial crisis,

indicating more volatile markets, and strengthened the importance of bookrunner certification to

investors.

37

6. Conclusions

In this paper we examine the impact of a range of bond bookrunner syndicate characteristics on

the quality of bookrunner services pre- and post-financial crisis. We use two-stage regression

models on the at-issue credit spread as our measure of quality. Our sample incorporates 1,224

euro-denominated investment grade public bond tranches made by 324 Western European firms

from 2001 to 2012.

This research extends prior evidence studying the influence of bookrunner syndicate

structure (Fang, 2005; Shivdasani and Song, 2011). For our sample we can jointly analyze highly

homogeneous issuers and heterogeneous bookrunner syndicate structures. Our sample of

investment grade rated tranches includes only large and well-established borrowers, firms who

should in theory enjoy limited benefits from the certification and placement services offered by

their bookrunners. At the same time the euro-denominated bond market is characterized by a

high degree of geographic dispersion amongst bookrunners, as well as recent structural trends

that have resulted in rapid changes in bookrunner syndicate sizes and roles.

We find that a broad range of bookrunner parameters are of importance to the pricing of

corporate bond tranches. We find that the highest quality bookrunner services are offered by

domestic banks. This result continues to hold when comparing to non-domestic active and high

reputation bookrunners. Non-domestic bookrunners should offer greater search benefits, but this

is outweighed in our sample by the greater certification benefits provided by domestic

bookrunners.

Syndicate structure becomes especially important amongst the larger post-financial crisis

bookrunner syndicates, being associated with greater coordination and free-rider costs. Assuming

that geographic proximity reflects strength of relationship, these results suggest that there is an

38

important distinction between insider and outsider bookrunners with insider bookrunners better

able to perform their certification and placement responsibilities.

We find that reputation is of lesser importance. Top 10 bookrunners are only able to offer

higher quality services when introduced as a domestic bookrunner. We conjecture that in a

culturally diverse market such as the European Union higher reputation banks have risen to the

top of the league tables through winning a large share of domestic capital markets business.

Our results also show that the larger bookrunner syndicates that have emerged since the

financial crisis tend to perform lower quality services, reflecting coordination and free-rider

problems (Diamond, 1996). Issuers are able to reduce such agency costs by relegating some of

their bookrunners to a passive status, only performing the certification role, while a subset of

trusted banks maintain an active status, responsible for both placement and certification

workstreams. This role split is a fairly recent innovation in the capital markets, to our knowledge

not yet studied in prior literature. It limits the degree of coordination required for the placement

related workstream without impacting the benefits received through the non-coordinated

certification-related workstreams. Overall, our findings suggest that both the identity and

responsibility of appointed bookrunners is of importance to the quality of service provided by

these financial intermediaries.

39

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41

Table 1

Variable definitions and data sources

The table presents variable definitions for bookrunner, bond, and firm characteristics for a sample of 1,224 euro-

denominated public bond tranches issued by 324 Western European firms during 2001-2012.

Variable Name Calculation Source

Panel A: Bookrunner (BR) characteristics

Bookrunner quantity

Number of BRs

A count of the total number of bookrunners on a tranche. Dealogic, Bond

prospectus

Bookrunner active-passive split

Number of Active BRs A count of the total number of active bookrunners on a

tranche.

Dealogic, Bond

prospectus, Financial

press

Passive BR An indicator variable taking the value of one if a tranche

includes a passive bookrunner, and zero otherwise.

Dealogic, Bond

prospectus, Financial

press

Bookrunner reputation

% of Top 10 BRs The percentage of bookrunners on a tranche that are a Top

10 bank by deal value during the sample period.

Dealogic, Bond

prospectus

% of Active Top 10

BRs

The percentage of active bookrunners on a tranche that are a

Top 10 bank by deal value during the sample period.

Dealogic, Bond

prospectus, Financial

press

Bookrunner geography

% of Non-domestic

BRs

The percentage of bookrunners headquartered in a different

country to the issuer.

Dealogic, Bond

prospectus

% of Non-domestic

Active BRs

The percentage of active bookrunners headquartered in a

different country to the issuer.

Dealogic, Bond

prospectus, Financial

press

% of Non-domestic

Active Top 10 BRs

The percentage of active bookrunners headquartered in a

different country to the issuer and who are ranked as a Top

10 bank by deal value during the sample period.

Dealogic, Bond

prospectus, Financial

press

42

Panel B: Tranche and firm characteristics

Dependent variable

At-issue credit

spread

At-issue yield to maturity minus the benchmark euro midswap

rate for the equivalent tenor.

Dealogic, Bond prospectus

Instrumental variables

Southern Europe An indicator variable set equal to one if the issuer is domiciled

in Greece, Italy, Portugal or Spain, and zero otherwise.

Company reports

Frequency Total number of tranches issued by the borrowing firm during

the sample period.

Dealogic

Debut An indicator variable set equal to one if the bond represents the

firm’s first syndicated public bond in the euro-denominated

market, and zero otherwise.

Dealogic

Control variables

Firm size The natural logarithm of the issuer’s book value of total assets

in EUR billions.

Worldscope

Profitability Earnings before interest, taxes, depreciation and amortization

(EBITDA) divided by book value of total assets.

Worldscope

Intangible assets One minus the ratio of net property, plant, and equipment

divided by the book value of total assets.

Worldscope

Leverage Book value of total debt divided by total assets. Worldscope

Growth

opportunities

Book value of total assets plus market value of equity minus

book value of equity, divided by the book value of total assets.

Worldscope

Publicly owned An indicator variable equal to one if 50% or more of the firm’s

shares are owned by the national government, and zero

otherwise.

Company reports

Credit rating The numeric value for the S&P rating assigned to the bond

tranche on the issue date, ascending from 1 for AAA to 10 for

BBB- and 11 for unrated tranches.

S&P

Maturity The natural logarithm of the tenor of the tranche in years. Dealogic

Tranche size The natural logarithm of the amount issued in EUR billions. Dealogic

Multi-tranche An indicator variable equal to one if the issuer sells 2 or more

tranches in the same currency on the same day, and zero

otherwise.

Dealogic

43

Table 2

Summary statistics of bookrunner characteristics and control factors

The table presents summary statistics of a sample of 1,224 euro-denominated public bond tranches issued by 324

Western European firms during 2001-2012. All variables are defined in Table 1.

Number of

Observations Mean Median St. Dev

Panel A: Bookrunner (BR) characteristics

Number of BRs 1224 4.074 4.000 2.134

Number of Active BRs 1224 3.680 4.000 1.329

Passive BR 1224 0.084 - -

% of Top 10 BRs 1224 0.620 0.625 0.259

% of Active Top 10 BRs 1224 0.630 0.667 0.264

% of Non-domestic BRs 1224 0.659 0.667 0.248

% of Non-domestic Active BRs 1224 0.658 0.667 0.255

% of Non-domestic Active Top 10 BRs 1224 0.437 0.500 0.258

Panel B : Tranche and firm characteristics

At-issue credit spread 1194 1.370 0.960 1.188

Southern Europe 1224 0.171 - -

Frequency 1224 8.821 7.000 6.946

Debut 1224 0.242 - -

Firm size 1095 57.888 36.431 56.329

Profitability 1095 0.148 0.112 0.905

Intangible assets 1095 0.650 0.675 0.204

Leverage 1095 0.341 0.350 0.154

Growth opportunities 1043 1.342 1.197 0.495

Publicly owned 1224 0.138 - -

Credit rating 1224 7.239 7.000 2.336

Maturity 1224 7.302 7.000 4.895

Tranche size 1224 0.816 0.750 0.500

Multi-tranche 1224 0.296 - -

44

Table 3

Bookrunner rankings

The table ranks investment banks according to their activity as bookrunners for our sample of 1,224 euro-denominated public bond tranches issued

by 324 Western European firms during 2001-2012.

Any Bookrunner role Active Bookrunner role

Apportioned issuance

Apportioned issuance

Rank Bookrunner EURbn % cumulative

%

Number

of

tranches

Rank Bookrunner EURbn % cumulative

%

Number

of

tranches

1 Deutsche Bank 91.5 9.2% 9.2% 387 1 Deutsche Bank 99.3 10.0% 10.0% 376

2 BNP Paribas 89.9 9.0% 18.2% 427 2 BNP Paribas 92.2 9.2% 19.2% 407

3 SocGen 74.7 7.5% 25.7% 361 3 SocGen 71.4 7.2% 26.3% 341

4 HSBC 70.8 7.1% 32.7% 312 4 Barclays 64.3 6.4% 32.8% 269

5 Barclays 64.2 6.4% 39.2% 287 5 HSBC 63.6 6.4% 39.2% 291

6 JPMorgan 60.6 6.1% 45.3% 259 6 JPMorgan 63.2 6.3% 45.5% 238

7 Citi 60.1 6.0% 51.3% 274 7 Citi 56.5 5.7% 51.1% 239

8 RBS 57.8 5.8% 57.1% 288 8 RBS 55.5 5.6% 56.7% 264

9 Credit Agricole

CIB 52.8 5.3% 62.4% 262 9

Credit Agricole

CIB 49.5 5.0% 61.7% 243

10 UniCredit 34.7 3.5% 65.8% 166 10 UniCredit 29.4 2.9% 64.6% 143

11 Commerzbank 27.0 2.7% 68.5% 115 11 ABN AMRO* 26.6 2.7% 67.3% 94

12 ABN AMRO* 25.8 2.6% 71.1% 96 12 Commerzbank 25.1 2.5% 69.8% 110

13 ING 24.1 2.4% 73.5% 134 13 Credit Suisse 23.9 2.4% 72.2% 95

14 Natixis 24.1 2.4% 76.0% 139 14 Morgan Stanley 22.5 2.3% 74.4% 84

15 Credit Suisse 23.2 2.3% 78.3% 105 15 Santander 21.2 2.1% 76.6% 106

16 Santander 23.0 2.3% 80.6% 136 16 Natixis 20.7 2.1% 78.6% 128

17 Morgan Stanley 20.1 2.0% 82.6% 94 17 ING 20.0 2.0% 80.6% 117

18 BBVA 18.7 1.9% 84.5% 96 18 UBS 14.8 1.5% 82.1% 73

19 UBS 16.6 1.7% 86.1% 92 19 Dresdner

Kleinwort 14.6 1.5% 83.6% 57

20 Goldman Sachs 16.1 1.6% 87.7% 74 20 Goldman Sachs 14.2 1.4% 85.0% 62

21 BoAML 15.5 1.6% 89.3% 92 21 BBVA 14.1 1.4% 86.4% 81

22 Dresdner

Kleinwort 14.6 1.5% 90.8% 57 22 BoAML 13.8 1.4% 87.8% 73

23 Intesa Sanpaolo 12.5 1.3% 92.0% 78 23 Merrill Lynch* 12.2 1.2% 89.0% 41

24 Merrill Lynch* 10.8 1.1% 93.1% 41 24 Intesa Sanpaolo 10.5 1.0% 90.1% 65

25 Mitsubishi 10.6 1.1% 94.2% 63 25 Lehman

Brothers 9.4 0.9% 91.0% 37

* marks pre-acquisition/merger entities, i.e. the league table credits of ABN AMRO before the takeover of its investment banking activities by RBS

45

Table 4

Determinants of bookrunner group size and active-passive split

The table reports first stage regressions predicting the determinants of bookrunner syndicate size and role allocations

for a sample of 1,224 euro-denominated public bond tranches issued by 324 Western European firms during 2001-

2012. Models 1 and 2 are ordinary least squares regressions and model 3 presents the results of a probit regression of

the decision to use a passive bookrunner. All variables are defined in Table 1. P-values are calculated from bond

level-clustered standard errors. ***, **, and * denote significance at the 1%, 5%, and 10% levels respectively.

Model 1 Model 2 Model 3

Number of BRs Number of Active BRs Passive BR Probit

Constant -12.835

*** -7.735

*** -10.611

***

(0.000) (0.000) (0.006)

Southern Europe 0.950

*** 0.783

*** 0.484

**

(0.000) (0.000) (0.011)

Frequency -0.046

*** -0.045

*** -0.018

(0.000) (0.000) (0.320)

Debut -0.337

* -0.127 -0.2905

(0.053) (0.270) (0.212)

Firm size 0.059 0.188

*** -0.091

(0.614) (0.001) (0.431)

Profitability 0.014 0.007 -0.033

(0.104) (0.257) (0.270)

Intangible assets -0.364 -0.131 -0.131

(0.206) (0.589) (0.769)

Leverage -0.556 1.010

*** -0.899

(0.393) (0.003) (0.152)

Growth opportunities 0.028 -0.010 0.121

(0.877) (0.912) (0.477)

Publicly owned -0.544

* -0.106 -0.076

(0.071) (0.603) (0.801)

Credit rating 0.092

** 0.115

*** 0.064

(0.026) (0.000) (0.172)

Maturity -0.026 0.109 -0.035

(0.837) (0.117) (0.792)

Tranche size 0.816

*** 0.473

*** 0.454

**

(0.000) (0.000) (0.018)

Multi-tranche 1.057

*** 0.462

*** 0.608

***

(0.000) (0.000) (0.001)

Year and Sector controls yes yes yes

Number of Observations 1017 1017 1017

R2 / Pseudo R

2 0.386 0.404 0.261

Wald χ2

104.14***

(0.000)

F-statistic 16.66

*** 23.18

***

(0.000) (0.000)

46

Table 5

Determinants of bookrunner reputation and geography

The table reports first stage ordinary least squares regressions predicting the determinants of bookrunner syndicate

reputation and the geographic location of syndicate members for a sample of 1,224 euro-denominated public bond

tranches issued by 324 Western European firms during 2001-2012. All variables are defined in Table 1. P-values are

calculated from bond level-clustered standard errors. ***, **, and * denote significance at the 1%, 5%, and 10%

levels respectively.

Model 1 Model 2 Model 3 Model 4 Model 5

% of Top 10

BRs

% of Active Top

10 BRs

% of Non-

domestic BRs

% of Non-

domestic Active

BRs

% of Non-

domestic Active

Top 10 BRs

Constant -0.524 -0.781 0.745

* 0.783

* -0.125

(0.276) (0.108) (0.080) (0.078) (0.786)

Southern

Europe

-0.100***

-0.082***

0.066***

0.088***

0.110***

(0.000) (0.004) (0.004) (0.000) (0.000)

Frequency -0.000 0.0002 -0.005

** -0.005

** -0.002

(0.885) (0.917) (0.022) (0.022) (0.262)

Debut -0.049

* -0.047

* -0.062

** -0.055

** -0.062

**

(0.072) (0.089) (0.017) (0.038) (0.024)

Firm size -0.019 -0.020 0.023

* 0.024

* 0.004

(0.178) (0.168) (0.071) (0.061) (0.777)

Profitability 0.009

*** 0.009

*** -0.009

*** -0.009

*** -0.005

***

(0.000) (0.000) (0.000) (0.000) (0.000)

Intangible

assets

-0.004 0.008 -0.049 -0.029 -0.018

(0.945) (0.893) (0.401) (0.636) (0.751)

Leverage -0.082 -0.093 0.057 0.075 -0.035

(0.261) (0.217) (0.445) (0.326) (0.642)

Growth

opportunities

0.017 0.020 0.001 0.003 -0.007

(0.490) (0.415) (0.967) (0.913) (0.773)

Publicly owned 0.060 0.070

* -0.139

*** -0.148

*** -0.002

(0.151) (0.092) (0.001) (0.001) (0.966)

Credit rating 0.006 0.006 -0.017

*** -0.020

*** -0.007

(0.302) (0.304) (0.006) (0.002) (0.288)

Maturity 0.032

* 0.032

* -0.019 -0.024 0.002

(0.051) (0.064) (0.231) (0.138) (0.886)

Tranche size 0.058

** 0.071

*** 0.001 -0.001 0.035

(0.015) (0.003) (0.945) (0.981) (0.135)

Multi-tranche 0.012 0.010 0.047

** 0.050

** 0.048

**

(0.575) (0.674) (0.018) (0.016) (0.039)

Year and

Sector controls yes yes yes yes yes

Number of

Observations 1017 1017 1017 1017 1017

R2 / Pseudo R

2 0.109 0.096 0.127 0.138 0.107

F-statistic 16.66

*** 23.18

*** 20.93

*** 24.49

*** 6.94

***

(0.000) (0.000) (0.000) (0.000) (0.000)

47

Table 6

Regression analysis of impact of bookrunner quantity and active-passive split on at-issue credit spread

The table reports second-stage regressions for two-stage regression models predicting the at-issue credit spread of

1,224 euro-denominated public bond tranches issued by 324 Western European firms during 2001-2012. First stage

selection models are presented in Table 4 and examine the determinants of bookrunner syndicate structure. Second

stage outcome regressions examine the determinants of at-issue credit spreads against predicted bookrunner

characteristics from the first stage selection model. Models 1 and 2 report results for selection models based on

instrumental variable two-stage least squares (IV-2SLS) regressions. Model 3 reports results for a selection model

using a Heckman two-stage regression. All variables are defined in Table 1. P-values are calculated from bond level-

clustered standard errors. ***, **, and * denote significance at the 1%, 5%, and 10% levels respectively.

Model 1 Model 2 Model 3

Number of BRs Number of Active BRs Passive BR

Constant 0.535 -0.185 1.357

(0.767) (0.909) (0.554)

Bookrunner syndicate size 0.180

** 0.206

**

(0.018) (0.022)

Passive BR mills ratio -0.326

**

(0.046)

Firm size -0.038 -0.058

* -0.020

(0.324) (0.090) (0.633)

Profitability -0.072

*** -0.071

*** -0.059

***

(0.000) (0.000) (0.000)

Intangible assets 0.098 0.056 0.064

(0.517) (0.706) (0.678)

Leverage 0.733

*** 0.454

** 0.856

***

(0.002) (0.041) (0.001)

Growth opportunities -0.260

*** -0.254

*** -0.289

***

(0.002) (0.002) (0.001)

Publicly owned -0.007 -0.086 -0.102

(0.967) (0.545) (0.469)

Credit rating 0.174

*** 0.166

*** 0.171

***

(0.000) (0.000) (0.000)

Maturity -0.021 -0.048 -0.014

(0.729) (0.418) (0.813)

Tranche size 0.011 0.059 0.036

(0.915) (0.498) (0.727)

Multi-tranche -0.306

*** -0.212

*** -0.281

**

(0.007) (0.009) (0.017)

Year and Sector controls yes yes yes

Number of Observations 1017 1017 1017

R2 / Pseudo R

2 0.474 0.498 0.496

48

Table 7

Regression analysis on impact of bookrunner reputation on at-issue credit spread

The table reports second-stage regressions for two-stage regression models predicting the at-issue credit spread of

1,224 euro-denominated public bond tranches issued by 324 Western European firms during 2001-2012. First stage

selection models are presented in Table 4 and examine the determinants of bookrunner syndicate structure. Second

stage outcome regressions examine the determinants of at-issue credit spreads against predicted bookrunner

characteristics from the first stage selection model. All models are based on instrumental variable two-stage least

squares (IV-2SLS) regressions. All variables are defined in Table 1. P-values are calculated from bond level-

clustered standard errors. ***, **, and * denote significance at the 1%, 5%, and 10% levels respectively.

Model 1 Model 2 Model 3 Model 4 Model 5

% of Top 10

BRs

% of Active Top

10 BRs

% of Non-

domestic BRs

% of Non-

domestic Active

BRs

% of Non-

domestic Active

Top 10 BRs

Constant -2.887

* -3.629

* -3.033

* -1.784 2.472

(0.083) (0.053) (0.059) (0.242) (0.484)

Bookrunner

reputation

-2.108**

-2.346**

(0.025) (0.048)

Bookrunner

geography

1.560* 1.644

** 1.676

**

(0.083) (0.039) (0.022)

Firm size -0.076

* -0.079

* -0.078

** -0.0767

** -0.027

(0.065) (0.070) (0.044) (0.041) (0.711)

Profitability -0.053

*** -0.052

*** -0.055

*** -0.065

*** -0.549

(0.000) (0.000) (0.000) (0.000) (0.612)

Intangible

assets

0.028 0.050 0.105 0.01858 0.231

(0.883) (0.801) (0.560) (0.906) (0.581)

Leverage 0.421 0.399 0.545

** 0.550

** 0.530

(0.109) (0.155) (0.036) (0.025) (0.318)

Growth

opportunities

-0.207**

-0.198**

-0.263***

-0.271***

-0.135

(0.017) (0.032) (0.005) (0.004) (0.578)

Publicly owned 0.006 0.040 0.096 -0.119 -0.466

(0.972) (0.839) (0.648) (0.410) (0.154)

Credit rating 0.200

*** 0.201

*** 0.216*** 0.192

*** 0.179

***

(0.000) (0.000) (0.000) (0.000) (0.000)

Maturity 0.054 0.059 0.006 -0.007 -0.007

(0.448) (0.436) (0.928) (0.919) (0.951)

Tranche size 0.277

*** 0.321

*** 0.163** 0.138

* -0.172

(0.002) (0.003) (0.029) (0.077) (0.414)

Multi-tranche -0.091 -0.093 -0.187** -0.125 -0.056

(0.310) (0.342) (0.041) (0.114) (0.703)

Year and Sector

controls yes yes yes yes yes

Number of

Observations 1017 1017 1017 1017 1017

R2 / Pseudo R

2 0.312 0.236 0.407 0.401 0.385

49

Table 8

Univariate comparison of tranche and issuer characteristics for pre and post financial crisis subsamples

The table reports summary statistics for the pre- and post-financial crisis subsamples of 1,224 euro-denominated public bond issues made by 324

Western European firms during 2001-2012. Pre-financial crisis includes all tranches priced before September 2008 while post-financial crisis

includes all tranches priced after this date. P-values are reported for ANOVA tests of difference in means and Kruskal-Wallis tests of difference in

medians.

Pre-financial crisis

Post-financial crisis

Independent variables Number of.

Observations Mean Median

Number of

Observations Mean Median

T-test

of

means

Wilcoxon-

Rank-Sum

Panel A: Bookrunner characteristics

Number of BRs 586 3.211 3.000 638 4.865 4.000 0.000 0.000

Number of Active BRs 586 3.160 3.000 638 4.157 4.000 0.000 0.000

Passive BR 586 0.017 0.000 638 0.146 0.000 0.000 0.000

% of Top 10 BRs 586 0.611 0.667 638 0.627 0.600 0.304 0.391

% of Active Top 10 BRs 586 0.613 0.667 638 0.645 0.667 0.040 0.059

% of Non-domestic BRs 586 0.670 0.667 638 0.649 0.667 0.141 0.298

% of Non-domestic Active BRs 586 0.671 0.667 638 0.647 0.667 0.105 0.167

% of Non-domestic Active Top 10 BRs 586 0.424 0.400 638 0.449 0.500 0.083 0.092

Panel B: Tranche characteristics

At-issue credit spread 556 0.711 0.600 637 1.946 1.600 0.000 0.000

Southern Europe 586 0.162 0.000 638 0.179 0.000 0.441 0.442

Frequency 586 9.420 7.000 638 8.271 7.000 0.004 0.094

Debut 586 0.321 0.000 638 0.169 0.000 0.000 0.000

Credit rating 586 6.792 7.000 638 7.650 8.000 0.000 0.000

Maturity 586 7.507 7.000 638 7.113 7.000 0.159 0.681

Tranche size 586 0.850 0.750 638 0.784 0.750 0.023 0.488

Multi-tranche 586 0.341 0.000 638 0.254 0.000 0.001 0.001

50

Table 9

Impact of bookrunner quantity and active-passive split on at-issue credit spread surrounding financial crisis

The table reports two-stage regression analysis predicting the at-issue credit spread of 1,224 euro-denominated

public bond tranches issued by 324 Western European firms during 2001-2012. First stage selection models examine

the determinants of bookrunner syndicate structure. Second stage outcome regressions examine the determinants of

at-issue credit spreads against predicted bookrunner characteristics from the first stage selection model. Pre-financial

crisis includes all tranches priced before September 2008 while post-financial crisis includes all tranches priced after

this date. Models 1 and 2 report results for selection models based on instrumental variable two-stage least squares

(IV-2SLS) regressions. Model 3 reports results for a selection model using a Heckman two-stage regression. All

variables are defined in Table 1. P-values are calculated from bond level-clustered standard errors. ***, **, and *

denote significance at the 1%, 5%, and 10% levels respectively.

Model 1 Model 2 Model 3

Number of BRs Number of Active BRs Passive BR

Panel A: Pre-financial crisis

Bookrunner syndicate size -0.004 0.010

(0.972) (0.933)

Passive BR mills ratio 0.008

(0.914)

Firm and Tranche controls yes yes yes

Year and Sector controls yes yes yes

Number of Observations 474 474 474

R2 / Pseudo R2 0.554 0.556 0.555

Panel B: Post-financial crisis

Bookrunner syndicate size 0.232

** 0.264

**

(0.017) (0.020)

Passive BR mills ratio -0.530

*

(0.093)

Firm and Tranche controls yes yes yes

Year and Sector controls yes yes yes

Number of Observations 543 543 543

R2 / Pseudo R

2 0.370 0.412 0.415

51

Table 10

Impact of bookrunner reputation on at-issue credit spread surrounding financial crisis

The table reports two-stage regression analysis predicting the at-issue credit spread of 1,224 euro-denominated

public bond tranches issued by 324 Western European firms during 2001-2012. First stage selection models examine

the determinants of bookrunner syndicate structure. Second stage outcome regressions examine the determinants of

at-issue credit spreads against predicted bookrunner characteristics from the first stage selection model. Pre-financial

crisis includes all tranches priced before September 2008 while post-financial crisis includes all tranches priced after

this date. All models are based on instrumental variable two-stage least squares (IV-2SLS) regressions. All variables

are defined in Table 1. P-values are based on standard errors calculated from bond level-clustered standard errors.

***, **, and * denote significance at the 1%, 5%, and 10% levels respectively.

Model 1 Model 2 Model 3 Model 4 Model 5

% of Top 10

BRs

% of Active

Top 10 BRs

% of Non-

domestic BRs

% of Non-

domestic Active

BRs

% of Non-

domestic Active

Top 10 BRs

Panel A: Pre-financial crisis

Bookrunner

reputation

0.353 0.404

(0.381) (0.362)

Bookrunner

geography

1.175 1.004 0.942

(0.228) (0.251) (0.144)

Firm and Tranche

controls yes yes yes yes yes

Year and Sector

controls yes yes yes yes yes

Number of

Observations 474 474 474 474 474

R2 / Pseudo R2 0.527 0.521 0.2928 n.m.f. n.m.f.

Panel B: Post-financial crisis

Bookrunner

reputation

-4.246* -3.404

(0.072) (0.170)

Bookrunner

geography

1.893* 2.020

** 2.417

***

(0.069) (0.023) (0.009)

Firm and Tranche

controls yes yes yes yes yes

Year and Sector

controls yes yes yes yes yes

Number of

Observations 543 543 543 543 543

R2 / Pseudo R

2 n.m.f. 0.055 0.331 0.328 0.287

52

Figure 1

Pattern of tranche issue volume and at-issue credit spreads over time

The chart presents average statistics for number of tranches issued and at-issue credit spread for 1,224 euro-denominated public bond tranches

issued by 324 Western European firms during 2001-2012.

0

0.5

1

1.5

2

2.5

3

3.5

0

10

20

30

40

50

60

70

80

Q1

-01

Q3

-01

Q1

-02

Q3

-02

Q1

-03

Q3

-03

Q1

-04

Q3

-04

Q1

-05

Q3

-05

Q1

-06

Q3

-06

Q1

-07

Q3

-07

Q1

-08

Q3

-08

Q1

-09

Q3

-09

Q1

-10

Q3

-10

Q1

-11

Q3

-11

Q1

-12

Q3

-12

At-issue credit spread

No. tranches issued

No. tranches Av. Credit Spread