Corporate bond ratings, underwriters’ reputation and cost of bonds

ABSTRACT

This paper studies the impact of underwriters’ reputation on corporate bond ratings and issuers’ cost of bonds measured by their yield spread in China. By analyzing all corporate bond issues from the first issue in August 2007 to October 2014, this study finds that after controlling for the endogenous issue and other factors, rating agencies are likely to take the reputation of underwriters into consideration when assigning credit ratings. Furthermore, the reputation of underwriters can decrease bond financing costs through the channel of credit ratings. Specifically, the higher the reputation of underwriters is, the higher the credit ratings and the lower the yield spread of bonds will be. This study provides new evidence for the effect of underwriters’ reputation in the process of bond initial issuing in China.

KEYWORDS:

• Corporate bond
• credit rating
• underwriters’ reputation
• yield spread
• cost of bond

Acknowledgments

We would like to thank Tsung-Kang Chen and Editor Suresh Radhakrishnan for their helpful comments and suggestions. Chao Chen would like to acknowledge financial support from National Natural Science Foundation of China (Projects #71472048 and 71772050).

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Lambda2 is acquired similarly in the case of auditors where we change the dependent variable of Equation (1) from Repu_underwriter to Repu_auditor.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71772050];National Natural Science Foundation of China [71472048]