This paper being the first to examine the phenomenon of league table competition in the market of debt underwriting, we show significant influence of the recent league table performance on the behavior of investment banks in the U.S. corporate bond market. Similar to results for the credit rating market, we document a focus on bonds of higher quality for those investment banks, which faced a decline in league table rankings compared to the previous year. This perspective further differentiates, when we expand our analysis by the fraction of revenues an underwriter generates by investment banking services. While underwriters with a diversified revenue base behave as suggested by our initial results, we find specialized investment banks to even lower certification standards. Finally, we show the compensation of underwriters to be influenced by their recent league table performance. These results are consistent with previous findings and further illustrate the motivation of investment banks to compete for the best ranks in the league tables.
Table of Contents
1. Introduction
2. Review of related literature and hypotheses
2.1 The role of reputation in debt underwriting and other investment banking diciplines
2.2 Measuring reputation
2.3 League table competition and hypotheses
3. Description of employed variables
3.1 Measuring bond quality and underwriter compensation
3.2 League table performance and investment banking revenue share
3.3 Control variables
4. Sample construction, descriptive statistics and methodology
4.1 Used data and sample construction
4.2 Descriptive statistics
4.3 Methodology
5. Empirical findings and interpretation
5.1 League table performance and quality-based reputation
5.2 Investment banking revenues
5.3 League table performance and underwriter compensation
5.4 Interpretation of results
6. Conclusions
Research Objectives and Core Themes
This master thesis investigates how investment banks in the U.S. corporate bond market react to a decline in their annual league table rankings. The study analyzes whether such a decline incentivizes banks to prioritize underwriting high-quality bonds to restore their reputation or if high dependency on investment banking revenues forces them to accept lower-quality deals to regain market share rapidly.
- Impact of league table rankings on underwriter reputation.
- Strategic behavior of investment banks facing a decline in rank (reputation "milking" vs. certification).
- Influence of investment banking revenue dependency on underwriting standards.
- Relation between league table performance and underwriter compensation (gross spreads).
Excerpt from the Book
1. Introduction
“For Investment Banks, nothing is more important than making money, except perhaps the thing that tells people just how much money they are making. Enter the league table” – Tracy Alloway, September 27, 2013
The above statement addresses one of the central aspects of the modern investment banking industry, intensely discussed by both practitioners and academics: The achieved rank in the (annual) league tables. Although criticized on a regular basis for being easy to manipulate or not being an adequate measure for the overall quality of offered services (e.g. see Lonkevich, 2004 or Berman, 2007), league tables have become a popular tool to evaluate on the reputation and the prestige and investment banks owns (Bao and Edmans, 2011, p. 2290). The majority of league tables rank investment banks according to the value of securities underwritten or mergers & acquisitions (M&A) deals advised, with few examples also being based on the absolute number of issues or deals, respectively.
Summary of Chapters
1. Introduction: Provides an overview of the significance of league tables in investment banking and defines the study's focus on the U.S. corporate bond market.
2. Review of related literature and hypotheses: Discusses the role of reputation, certification theories, and develops the three core hypotheses regarding how banks react to rank declines.
3. Description of employed variables: Defines the metrics used to measure bond quality, underwriter reputation, and revenue dependency.
4. Sample construction, descriptive statistics and methodology: Details the data selection process and explains the OLS and probit regression models used for empirical analysis.
5. Empirical findings and interpretation: Presents and interprets the regression results, evaluating the hypotheses on underwriting quality, revenue dependency, and compensation.
6. Conclusions: Summarizes the major findings and provides recommendations for future research on underwriter behavior.
Keywords
Investment Banking, League Table Competition, Debt Underwriting, Reputation, Certification Hypothesis, Market Power Hypothesis, U.S. Corporate Bonds, Gross Spread, Bond Quality, Underwriter Compensation, Reputation Milking, Revenue Share, Reputation Cycles, Financial Intermediaries, Certification Standards
Frequently Asked Questions
What is the core focus of this thesis?
The thesis examines how investment banks react when their league table ranking declines, specifically within the U.S. corporate bond market.
What are the primary themes covered?
The study covers reputation management in investment banking, the certification function of underwriters, the impact of revenue dependency on business decisions, and the relation between rank and fee compensation.
What is the main research question?
The research investigates whether a decline in league table rank leads banks to improve bond quality to restore reputation, or if revenue pressures cause them to lower their underwriting standards.
Which scientific methods are employed?
The author uses empirical quantitative analysis, specifically applying Ordinary Least Squares (OLS) regressions and probit regressions to test the hypotheses against a dataset of U.S. corporate bonds.
What is covered in the main body of the work?
The main body includes a literature review, the derivation of three hypotheses, a detailed description of variables and data construction, and the reporting and interpretation of multivariate regression results.
Which keywords best describe this research?
Key terms include investment banking, league table competition, reputation, debt underwriting, certification hypothesis, and bond quality.
Does the study distinguish between types of banks?
Yes, it compares specialized investment banks with diversified commercial banks, noting that commercial banks may have different strategies due to their more diversified revenue base.
What does the study conclude about underwriter fees?
The study finds evidence that a continuous decline in league table performance negatively influences the gross spreads (fees) that an underwriter is able to charge for its services.
- Quote paper
- Christian Fleischer (Author), 2014, How investment banks react to a decline in league table rankings. Evidence from U.S. corporate bonds, Munich, GRIN Verlag, https://www.grin.com/document/274820
