{"title":"Does social capital matter in underwriter's fees?","authors":"Alex Annan Abakah","doi":"10.1016/j.gfj.2024.101005","DOIUrl":null,"url":null,"abstract":"<div><p>This study examines the influence of bond issuer's social capital on underwriting fees. Investors rely on accurate information to evaluate bond quality, while underwriters assume inventory risk stemming from uncertain investor demand. We posit that social capital enhances the quality of information disclosed by the issuer, consequently impacting the fees underwriters charge for bearing this risk. Utilizing data on new tax-exempt municipal bonds issued from U.S. counties over the period 1990–2017, we find that underwriters charge significantly lower fees for bonds issued from counties with higher social capital. This result remains robust after controlling for issuer and bond characteristics, as well as addressing potential endogeneity concerns. Further investigations show that the observed effect persists only in situations where underwriters bear greater risk, suggesting that social capital functions as a valuable form of certification within the underwriting process.</p></div>","PeriodicalId":46907,"journal":{"name":"Global Finance Journal","volume":"62 ","pages":"Article 101005"},"PeriodicalIF":5.5000,"publicationDate":"2024-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Global Finance Journal","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1044028324000772","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
This study examines the influence of bond issuer's social capital on underwriting fees. Investors rely on accurate information to evaluate bond quality, while underwriters assume inventory risk stemming from uncertain investor demand. We posit that social capital enhances the quality of information disclosed by the issuer, consequently impacting the fees underwriters charge for bearing this risk. Utilizing data on new tax-exempt municipal bonds issued from U.S. counties over the period 1990–2017, we find that underwriters charge significantly lower fees for bonds issued from counties with higher social capital. This result remains robust after controlling for issuer and bond characteristics, as well as addressing potential endogeneity concerns. Further investigations show that the observed effect persists only in situations where underwriters bear greater risk, suggesting that social capital functions as a valuable form of certification within the underwriting process.
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Global Finance Journal provides a forum for the exchange of ideas and techniques among academicians and practitioners and, thereby, advances applied research in global financial management. Global Finance Journal publishes original, creative, scholarly research that integrates theory and practice and addresses a readership in both business and academia. Articles reflecting pragmatic research are sought in areas such as financial management, investment, banking and financial services, accounting, and taxation. Global Finance Journal welcomes contributions from scholars in both the business and academic community and encourages collaborative research from this broad base worldwide.
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