Ch. 6: Security Offerings 285
Fernando, Gatchev, and Spindt (2005)develops and empirically tests a model of firm-
underwriter selection, where high (low) quality underwriters tend to sign contracts with
high (low) quality issuers. In their empirical tests, they find that issuers and underwriters
will associate with different partners for subsequent offerings if changes in issuer qual-
ity and/or underwriter reputation are large enough, suggesting that the association of
issuers and underwriters is transactional rather than relationship-based. However,Kim,
Palia, and Saunders (2005a)report evidence that the frequency of low (high) quality
issuers using high (low) quality underwriters is as frequent as high (low) quality issuers
employing high (low) quality issuers, which appears to be strong evidence against the
Fernando, Gatchev and Spindt model.
Gande, Puri, and Saunders (1999)was the first study to examine the competitive ef-
fects of commercial bank entry into the corporate debt underwriting market. They find
that underwriter spreads and ex-ante yields have declined significantly following com-
mercial bank entry in the market, consistent with commercial bank underwriters with
prior lending relationships with issuers having an information advantage over invest-
ment banks. They show that the reduction in underwriter spreads and ex-ante yields
is strongest among lower rated and smaller debt issues, where commercial banks have
underwritten a relatively greater proportion of these issues (as compared to investment
banks). They also show that bank entry has tended to decrease market concentration,
suggesting that commercial bank entry generally has had a pro-competitive effect. How-
ever, whether this is a short-term rather than a long-term effect is yet to be determined.
Narayanan, Rangan, and Rangan (2004)study commercial bank entry into the equity
underwriting market and report that commercial banks are increasing their roles as lead
managers in equity underwriters, though they usually participate as a co-lead manager
with an experienced investment bank.
Using a sample of SEOs from 1996–2001,Drucker and Puri (1989)finds that when a
financial intermediary concurrently lends to an issuer and underwrites the firm’s SEO,
the issuer benefits through lower financing costs, receiving lower underwriter fees and
lower loan yield spreads. This is particularly true for non-investment grade issuers, for
whom the informational economies of scope are likely to be large. They show that con-
current lending also helps underwriters build relationships, increasing the probability of
receiving future business. Specifically, they show that issuers with prior lending rela-
tionships receive lower underwriter spreads, while an underwriter with a prior lending
relationship with an issuer is more likely to receive its subsequent underwriting assign-
ments.
Wu and Kwok (2003)study global IPOs and the effects of competition by examining
the pricing of global initial public offerings made by U.S. companies as compared to
purely domestic offerings. They find that global participation significantly reduces un-
derpricing (on average by four percentage points), and that underpricing is negatively
related to the proportion of shares allocated to foreign investors. They conclude that
U.S. companies time their global offerings when foreign demand for U.S. shares is
high.Cornett, Davidson, and Rangan (1996)investigated the effects of Rule 415 on the