The impact of bank entry in the Japanese corporate bond underwriting market

Abstract

The 1993 Japanese financial system reform allowed banks to enter the underwriting market for corporate bonds through bank-owned security subsidiaries. This paper examines empirically whether underwriting commissions and yield spreads on corporate straight bonds issued domestically fell as a result of this bank entry. The empirical results show that bank entry significantly lowers both underwriting commissions and yield spreads. Commissions charged by banks are significantly lower than those charged by investment houses. Lending and shareholding relationships between the issuer and underwriter are not important in determining commissions or yield spreads.

Do the equity holding and soundness of bank underwriters affect issue costs of SEOs?

“…These results are consistent with the condition that Puri (1999) argued for regarding the coexistence of banks and investment houses. The estimated coefficients of the Main Bank UW are not significantly associated with the discount rate, which is consistent with Takaoka and McKenzie (2006).…”

“…To investigate the robustness of the results, I used sample selectivity methods following Takaoka and McKenzie (2006). The results discussed above do not differ when I control for the endogeneity of the bank's underwriting decisions using selectivity methods.…”

Deregulation of bank underwriting activities: impacts in the Euro–yen and Japanese corporate bond markets

“…In the domestic corporate bond market [18] present evidence of a statistically significant fall in spreads on domestic corporate yen bonds after banks are permitted to engage in underwriting within Japan. As a result of a greater competition with more underwriters in the Euro-yen market following the relaxation of the three bureaus agreement in April 1993, a similar effect could be expected for spreads in the Euro-yen market.…”

“…Following the literature on spread determination for corporate bonds issued in the United States (see, for example [13,14]), the recent literature examining spread determination on corporate bonds issued in Japan has focused on either the existence of conflicts of interest occurring when banks are allowed to act as underwriters in the bond market, or reductions in spreads/commissions when banks enter the underwriting market [4,7,17,18]. Recently, there has been an upsurge of interest in the analysis of the Euromarket.…”

Credit spreads on corporate bonds and the macroeconomy in Japan

“…They found that credit spreads are largely determined by those firm-specific factors associated with credit risk and liquidity premiums. 2 Takaoka and McKenzie (2006) among others empirically investigate the mechanism determining credit spreads in new issues markets, but not secondary markets, in Japan.…”