We study the mandated introduction of a supervised auction for the primary bond market in China. The regulatory intervention significantly reduced the cost of debt for Chinese issuers. Most of the benefits flowed from reduced agency conflict between underwriters and issuers. Using unique bidder-level data from a lead underwriter, we develop replicable tools and techniques to identify collusive bidding behavior resulting in artificial (and economically costly) increases in bond yields. Such evidence can benefit global regulators, issuers, and investors currently using unsupervised auction mechanisms, for example, in securities issuance, construction projects, and procurement.

Purpose – To examine whether and how the different levels of regional economic incentives would have an effect on underwriters’ market share in general. Design/methodology/approach – Drawing on Chinese IPO firms during the period 2006-2016, this study examines the impact of different levels of regional economic incentives on underwriters’ market share. Findings – The authors find thatregional economic incentives have a positive impact on underwriters’ market share and that local economic incentives have a significantly strongerimpact than central economic incentives. Furthermore, the authors find that IPO firms with underwriters driven by regional economic incentives experience worse post-IPO performance than firms with underwriters driven by central economic incentives, which do not experience a significant decline in post-IPO performance. Originality/value – Taken together, the authors’ findings are consistent with the notion that performance assessment motivates officials at various levels of government to bring companies in their jurisdiction to the IPO market prematurely. In addition, the results indicate that central economic incentives play a significantrole in driving China’s macroeconomic development and market-oriented system reforms. As such, they are one of the major driving forces behind China’s market-oriented system reforms.

The advantages and disadvantages of universal banking have long been debated. Using the successive granting of lead underwriter qualifications to commercial banks in China as a quasi-natural experiment, we study the impact of universal banking on non-financial firms’ investment decisions. We find that after a firm’s main lending banks qualify as lead underwriters, the firm’s investment increases by 7.7 to 8.3 percent on a gross or net basis. The underlying mechanism is that universal banking can generate informational economies of scope and relax constraints on the provision of external finance. In contrast, we find no evidence on the conflict of interest between universal banks and their customers. Our study, therefore, sheds light on the potential gains from universal banking.

We investigate the impact of the geographic proximity of underwriters on bond characteristics by using corporate and enterprise bonds issued in China from 2009 to 2019. We find bonds underwritten by underwriters in close geographic proximity are associated with lower financing costs, longer maturity in high and medium credit rating firms, shorter maturity in low credit rating firms, and lower default risk. Further, we find substitution effects between the geographic proximity of underwriter and underwriter reputation, and also between the geographic proximity of underwriter and firm transparency on reducing the costs of bond financing; i.e., a better reputation of the underwriter or higher transparency of the firm will weaken geographical proximate underwriters’ effects. Our results are robust in subsamples when firms have different degrees of local government connections.

Using samples of corporate bonds issued by Chinese A-share firms from 2007 to 2019, we examine how the type of local bond underwriting firm, specifically, whether the local underwriter has foreign shareholders or does not have foreign shareholders, affects the number of bond covenants. Our findings suggest that local underwriters with foreign shareholders (UFS) add more covenants to their bonds to protect the interests of bondholders than local underwriters without foreign shareholders (UNFS). Thus, having UFS underwrite bonds in an emerging market generally helps investor protection. Our conclusion remains robust to alternative metrics of bond covenants and foreign shareholders, and after accounting for endogeneity. Additional analyses suggest that the effect of UFS on bond covenants is more salient when: 1) the issuer is opaque, has a dual board chair and CEO, or is a non-state owned firm, 2) the issuer is located in a poor legal environment, in a low marketization area, or a region with poor economic development, or 3) the foreign shareholder of the local underwriter has experience in its home market, is from a country with a better legal environment, or has ample experience in the Chinese underwriting business.

Using a comprehensive dataset of Chinese corporate bond issuances, we uncover substantial evidence of issuance overpricing: the yield spread of newly issued bonds at their first secondary-market trading day is on average 5.35 bps higher than the issuance spread. This overpricing is robust across subsamples of bond issuances with different credit ratings, maturities, issuance types, and issuer status. We further provide extensive evidence to support a hypothesis that competition among underwriters drives this overpricing through two specific channels—either through rebates to participants in issuance auctions or through direct auction bidding by the underwriters for themselves or their clients.

We study how institutional investors utilize potentially biased information by analyzing the e ect of IPO underwriters' earnings forecasts on investors' bidding behaviors in Chinese IPO auctions. Despite the presence of upward biases in underwriters' earnings forecasts, we  nd that investors' bid prices are higher in IPOs with higher earnings forecasts. The investors' positive reaction to biased information can be explained in a rational expectation model where the underwriter has valuable information about the IPO but has a biased incentive in presenting the information to investors. Consistent with the model's predictions, we  nd that an investor's bid price is more sensitive to the underwriter's earnings forecast when the forecast bias is expected to be smaller, when the relative precision of the underwriter's information over the investor's information is higher, and when the investor has a higher valuation of the IPO.

With a sample of 504 IPO issuers over a period of 2002-2008 in China, this paper studies a previously ignored issue by examining the relationship between pre-IPO earnings management and underwriter reputation for issuers with different level of marketization. We document that underwriter reputation is negatively related to pre-IPO earnings management only if the issuer is highly marketized. Specifically, we find a significantly negative relationship between pre-IPO earnings management and underwriter reputation if the issuer is a non-state-owned enterprise (NSOE) issuer, a small-size issuer, or is listed on the Small and Medium Enterprise (SME) Board. No significant association is found for the state-owned enterprise (SOE) issuers, the large issuers, or Main Board issuers. We argue that the results are driven by the fact that issuers in the NSOE, small-sized, or SME market segment have more incentives to signal their earnings quality to avoid adverse selection by the investors, and/or reputable underwriters are more influential over their clients in mitigating earnings management.

The purpose of this paper is to investigate the certification and monitoring roles played by underwriters in IPO earnings management. Prior studies show that IPO issuers have incentives to employ opportunistic earnings management to enhance initial firm values. However, the certification role of underwriters has been largely overlooked. We argue that there is a negative relation between underwriter reputation and IPO earnings management. Moreover, we think that underwriters have strong incentives to continue providing monitoring to the firms they take public due to the lucrative business relationships. We thus hypothesize that there is a positive relation between underwriter reputation and post-IPO firm operating performance. Using a sample of 367 IPOs, we obtain results consistent with our hypotheses. We find that IPOs underwritten by lower-reputation underwriters have more initial discretionary accruals and higher initial firm values, indicating there is a significantly negative relation between IPO earnings management and underwriter reputation. We also find that the post-IPO operating performance of IPOs is significantly and positively related to underwriter reputation. For the robustness test, we consider the possibility that IPO earnings management and the choice of underwriters are endogenously determined. An instrumental variable two-stage least squares regression and a weighted least squares regression confirm the robustness of our results.

We present a model in which informational economies of scope that provide a cost advantage to universal banks oering “one-stop” shopping for lending and underwriting services also enable these intermediaries to “lock in” their clients’ subsequent business. This (limited) market power of universal banks reduces their incentive, relative to that of investment banks, to undertake costly eort in underwriting their clients’ securities. The consequent reduction in firms’ likelihood of successful security issues with universal bank underwriters prevents these intermediaries from using their scope economies to completely dominate their markets. Our analysis identifies economy, intermediary, and firm characteristics that motivate either the integration or segmentation of underwriting and bank lending. Our results also have implications for financial innovation and capital market development in markets characterized by the integration of financial services. Some of our empirical implications have not been tested; others can be compared with findings in Kroszner and Rajan (1994).