Syndication of European Buyouts and its Effects on Target‐Firm Performance

Using a unique dataset of 859 leveraged buyouts in Europe during the period 1999–2009, the authors' recent study reports that buyout financiers syndicate their transactions to other buyers to achieve benefits that include diversification of different types of target risk, the combination of complementary investor information and skillsets, and an increase in future deal flow. The authors also report that lead financiers structure their syndicates in ways designed to minimize syndication costs, in particular potential information and incentive problems with co‐investors in the syndicate, while also aiming to maximize the syndication benefits mentioned above. For example, through effective management of conflicts of interest with co‐investors within their syndicates, lead financiers are likely to acquire a reputation for looking out for the interests of their co‐investors that ends up increasing their own deal flow. As additional evidence in support of this claim, the authors also report finding that the post‐buyout profitability and growth of the target companies are higher when buyouts are syndicated (even after adjusting for the “endogeneity” of such decisions) and when the syndicates are structured to limit inter‐investor conflicts of interest within the syndicate. And as the authors point out, this finding, when viewed with the other main findings cited above, provides a more positive view of European buyout syndicates than the one projected by studies of Anglo‐American syndicates to date, whose findings have emphasized the potential for collusion among the buyout financiers.     

Breaking down the barriers: Competition,syndicate structure,and underwriting incentives

We argue that the entry of commercial banks into bond underwriting led to the evolution of co-led underwriting arrangements and lowered the screening incentives of underwriters. Lead underwriters in co-led syndicates faced weaker incentives to screen issuer quality. In boom markets, issues underwritten by co-led syndicates were more likely to be involved in financial misrepresentation events. Underwriter incentives in co-led syndicates were particularly weak in industries where commercial banks stole substantial market share. Similar patterns do not hold in bust markets where investors are likely to engage in their own information collection efforts. Our results suggest that competition may have an adverse effect on the incentives of financial intermediaries in market environments where their information production is more valuable to investors.     

Co‐managers,Information, and the Secondary Market Liquidity of Initial Public Offerings

We provide evidence that co‐managers improve initial public offering (IPO) liquidity through the “information” services they provide. Based on a sample of IPOs completed from January 1993 to December 2005, we find that a high number of co‐managers in the syndicate are associated with a lower spread, lower adverse selection costs, and a lower probability of informed trading. Moreover, increases in the offer price revision, in co‐managers’ underwriting rank, and in the number of analyst recommendations are all associated with the improvement in liquidity. This evidence is consistent with the hypotheses that co‐managers’ premarket and postmarket services mitigate information risk in the aftermarket.     

The role of co-managers in reducing flotation costs: Evidence from seasoned equity offerings

We examine the effect on expected flotation costs of including co-managers in the underwriting syndicate. We consider five components of SEO flotation costs: announcement returns, underpricing, the probability of withdrawals, offering delays, and underwriting spreads. The results show that the characteristics of co-managers participating in syndicates have significant effects on flotation costs, while the effect of the number of co-managers is largely insignificant. Our results are consistent with the notion that highly reputable underwriters and commercial banks serving as co-managers serve a certification role, reducing information asymmetries and, as a result, lowering SEO flotation costs.     

The Agency Structure of Loan Syndicates

Leaders of loan syndicates often delegate some administrative tasks to banks known as co‐agents. One reason is that co‐agents are specialized banks that help split the costs of managing the syndicate. Another reason is that co‐agents monitor the leader on behalf of syndicate members to mitigate informational asymmetry problems. Large sample tests on the Dealscan database provide support for both arguments. Evidence of repeated contracting between the same banks explains the moderate magnitude of monitoring effects.     

Underwriting Syndicates and the Cost of Debt: Evidence from Chinese Corporate Bonds

This article examines the association between underwriting syndicates and the cost of debt based on a sample of Chinese corporate bonds during 2007–2013. We find strong evidence that there is a negative relationship between forming underwriting syndicates and the cost of debt. The cost of bonds is more likely to decrease when the syndicate has more members—specifically, more joint managers. Additionally, by measuring the information asymmetry using several methods, we observe that this negative relationship is more pronounced when the information asymmetry between issuers and bond investors is more serious. The above results are robust after controlling for the potential endogeneity by constructing instrumental variables based on the unique setting of China’s corporate bond market.     

CEO Risk‐taking Incentives and Bank Loan Syndicate Structure

This paper investigates the effects of a borrowing firm's CEO risk‐taking incentives on the structure of the firm's syndicated loans. When CEO risk‐taking incentives are high, syndicates are structured to facilitate better due diligence and monitoring efforts. These syndicates have a smaller number of total lenders and are more concentrated, and lead arrangers will retain a greater portion of the loan. Moreover, CEO risk‐taking incentives have a lesser effect on the syndicate structure when lead arrangers have a good reputation and a prior lending relationship with a borrowing firm, while they have a greater effect on the syndicate structure when borrowing firms have low information transparency, are financially distressed or have low growth prospects.     

IPO Placement Risk and the Number of Co‐Managers

Previous studies show that co‐managers mainly affect initial public offering (IPO) aftermarket activities. We investigate the role of co‐managers in IPO pre‐market activities. We argue that co‐managers help reduce IPO placement risk and hypothesize that IPO issuers hire more co‐managers when placement risk is higher. We find the number of co‐managers is positively associated with three proxies for placement risk. IPOs with more price uncertainty and high‐tech IPOs hire more co‐managers, while IPOs in regulated industries hire fewer co‐managers. We also find larger IPOs, recent IPOs, and IPOs with more reputable lead underwriters hire more co‐managers.     

Syndicate structure and IPO outcomes: The impact of underwriter roles and syndicate concentration

We examine how the composition and concentration of the underwriting syndicate affects outcomes in U.S. initial public offerings (IPOs) from 2002 to 2020. Most IPOs now feature “phantom” lead managers who underwrite significantly fewer shares than the lead-left bookrunner. We hypothesize that the phantom lead is the result of bargaining between issuers wanting greater information production and lead-left bookrunners preferring greater control of the IPO. Larger, less concentrated IPO syndicates feature more absolute price adjustments from the filing price during bookbuilding with downward revisions on average, and more analyst following post-IPO. The magnitude of price adjustments is greater when adding active joint leads relative to passive phantom leads. More concentrated IPOs feature higher first-day returns following positive price adjustments. Adding lead managers reduces the likelihood the lead-left will retain that role in follow-on equity offerings.     

Competition and Coalition among Underwriters: The Decision to Join a Syndicate

This paper studies the decision of lead investment banks to organize hybrid syndicates (commercial banks participating as co‐managers) versus pure investment bank syndicates. The findings show that hybrid underwriting issues are more challenging to float. Compared to pure investment bank syndicates, hybrid syndicates serve clients that are smaller, have lower common stock rankings and less prior access to the capital markets, rely more on bank loans, and invest less capital but issue larger amounts, which indicates that commercial banks' participation enhances hybrid services. Moreover, lead investment banks tend to invite banks' participation when clients exhibit higher loyalty in reusing their services.     

The fast track IPO – Success factors for taking firms public with SPACs

Special Purpose Acquisition Companies (SPACs) are shells initiated with the sole intent of acquiring a single privately held company. SPAC shareholders vote on this acquisition, and in this paper we identify the factors that affect approval probability. Surprisingly, the data indicate more experienced managers and boards do not enhance the probability of deal approval. Similarly, glamor underwriters and larger underwriter syndicates are less likely to be associated with successful SPACs. Further, we find a negative relation between the presence of active investor (hedge funds and private equity funds) shareholdings in a SPAC and approval probability.     

The Development of Secondary Market Liquidity for NYSE-Listed IPOs

For NYSE‐listed IPOs, limit order submissions and depth relative to volume are unusually low on the first trading day. Initial buy‐side liquidity is higher for IPOs with high‐quality underwriters, large syndicates, low insider sales, and high premarket demand, while sell‐side liquidity is higher for IPOs that represent a large fraction of outstanding shares and have low premarket demand. Our results suggest that uncertainty and offer design affect initial liquidity, though order flow stabilizes quickly. We also find that submission strategies are influenced by expected underwriter stabilization and preopening order flow contains information about both initial prices and subsequent returns.     

Information Asymmetry and Organizational Structure: Evidence from REITs

We test for the differences in information asymmetry across two organizational forms (external and internal) in the REIT industry. We find significant differences with external REITs being significantly more transparent relative to internal REITs, and these differences are reflected in the loan contract terms and loan syndicate structure of loans made to these two types of REITs. We find that the relatively more transparent externally advised REITs are offered more favourable loan contracts in terms of lower loan rates and lower likelihood of collateral requirement. Further, loans to external REITs have syndicates that are larger in size and the lead lender retains a smaller portion of the loan, reflecting lower information asymmetry.     

Underwriter Compensation and Corporate Monitoring

Studies suggest that underwriting syndicates provide marketing services and certify the fairness of offer prices. We argue that syndicate lead banks also monitor manager effort, increasing the value of capital-raising companies. A given level of monitoring is associated with a given level of intrinsic value, so there is a “schedule” of certifiable offer prices, depending on the level of monitoring. Monitoring, marketing, and certification are, therefore, all legitimate syndicate functions. New evidence supporting the conclusion that syndicates provide corporate monitoring is presented.     

Auditor choice and information asymmetry: evidence from international syndicated loans

Analyzing a large sample of non-US public firms from 31 countries that obtain private loans, we find that loan syndicates that lend to borrowers that employ Big N auditors are larger and less concentrated and that the lead arrangers and largest investors of these syndicates are able to hold a lower proportion of the loan after issuance. Further analysis demonstrates that this effect exists only in countries with strong creditor rights and in those countries with high levels of societal trust, suggesting that both sound formal and informal institutional factors are prerequisites for lenders and borrowers to benefit from differential audit quality on loan syndicate structure efficiency. Furthermore, we find that the loan syndicate structure benefits for borrowers that employ Big N auditors are higher for borrowers with greater information asymmetry problems, but we do not find that Big N audits are able to address the information asymmetry and moral hazard issues between the lenders themselves.     

Syndicate Size,Spreads, and Market Power during the Introduction of Shelf Registration

The introduction of shelf registration in 1982 is used to examine the extent of price-taking behavior among investment banks. Changes in underwriting syndicates are compared with the concomitant adjustment in underwriting spreads and management fees. The evidence is consistent with higher organizing costs and/or market power in the underwriting syndicate. Evidence on the components of the spreads and syndicate composition during the introduction of shelf registration is also presented.     

Universal Banking, Asset Management, and Stock Underwriting

This paper examines institutions that underwrite IPOs and have asset management divisions from 1993 through 1998. We provide evidence that these firms use asset management funds as vehicles to help them earn more equity underwriting business. We also show that asset managers affiliated with IPO underwriters use their superior information about their own institution's IPOs to earn annualised market adjusted returns 7.6% above asset managers of firms who did not underwrite the IPO. Superior future returns by asset managers who trade affiliated IPOs are dependent on the information environment for the IPO and the underwriter reputation rank.     

Corporate ownership structure and bank loan syndicate structure

Using a novel data set on corporate ownership and control, we show that the divergence between the control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant impact on the concentration and composition of the firm's loan syndicate. When the control-ownership divergence is large, lead arrangers form syndicates with structures that facilitate enhanced due diligence and monitoring efforts. These syndicates tend to be relatively concentrated and composed of domestic banks that are geographically close to the borrowing firms and that have lending expertise related to the industries of the borrowers. We also examine factors that influence the relation between ownership structure and syndicate structure, including lead arranger reputation, prior lending relationship, borrowing firm informational opacity, presence of multiple large owners, laws and institutions, and financial crises.     

The Economics of IPO Stabilisation,Syndicates and Naked Shorts

Stabilisation is the bidding for and purchase of securities by an underwriter immediately after an offering for the purpose of preventing or retarding a fall in price. Stabilisation is price manipulation, but regulators allow it within strict limits – notably that stabilisation may not occur above the offer price. For legislators and market authorities, a false market is a price worth paying for an orderly market. This paper compares the rationale for regulators' allowing IPO stabilisation with its effects. It finds that stabilisation does have the intended effects, but that underwriters also seem to have other motives to stabilise, including favouring certain aftermarket sellers and enhancing their own reputation and profits. A puzzling aspect of stabilisation is why underwriters create ‘naked short’ positions which are loss‐making to cover when, as is usual, the aftermarket price rises to a premium. We set up a model to show that the lead underwriter may profit from a naked short at the expense of the rest of the syndicate given the way commissions are apportioned between them. We argue that a naked short mitigates the misalignment of interests which stabilisation causes between issuer and lead underwriter, although it does so at the expense of the non‐lead underwriters.     

Financial distress,information asymmetry,and syndicate structure: Evidence from Japanese borrowers

This paper examines how borrower firm characteristics affect syndicate size structure in the Japanese loan market for the 1999–2003 period when the banking system is undergoing a major consolidation. We find that syndicates are smaller when borrowers have higher credit risk and when borrowers present larger information asymmetries to the lending group. Interestingly, however, these results are primarily driven by keiretsu (business group) firms. This suggests that the benefits of enhanced monitoring and superior renegotiation prospects are especially useful for banks participating in syndicated loans to Keiretsu firms in Japan rather than informationally opaque, independent firms.