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Bank underwriting of corporate bonds: Evidence from Japan after 1994

We thank Goldman Sachs (Japan) for providing data; Serdar Dinç, Tadashi Kikugawa and participants of the Hugh Patrick Festschrift Conference for useful comments and conversation; and Mingzhu Wang for research assistance. Hamao gratefully acknowledges support from the Mitsubishi Trust and Banking Professorship at Columbia University. 1 ABSTRACT This paper examines a recent major change in the corporate bond primary market in Japan, namely bond underwriting by bank subsidiary securities firms. We analyze yields on corporate bonds at the time of issue, searching for evidence of conflict of interest, bank certification, distribution advantage, or aggressive entry strategy by banks. Bank subsidiaries have been successful in acquiring the underwriting business of firms which have been reducing their ties with main banks through decreasing loans, rather than serving firms for which the parent banks are the main banks. This tendency is especially clear in the more recent period. After controlling for firm and bond characteristics, the choice of underwriter (existing or bank subsidiary securities firms) generally does not have a material impact on yield spread. On the other hand, when the choice of underwriters is interacted with the maturities of corporate bonds, there is some evidence of net certification effect and/or aggressive pricing for bonds with longer maturities, which would have less competition with bank loans.