Does Underwriter Size Matter? Only Within the Right Context

The initial matching relationships between underwriters and bonds/issuing firms and the certification quality of underwriters, as determined by changes in the issuing firm’s financial strength post issue, are the two primary research topics in this dissertation. Based on total underwriter syndicate market share, two distinct categories, low market power (LMP) syndicates and high market power (HMP) syndicates were defined. Firm financial strength is examined based on a new factor developed in this research. A comparison of the two underwriting categories, or pools, indicates that the HMP underwriters take on firms of lower initial financial strength and additionally, the issuing firms decline more in financial strength two years following bond issuance than do firms using LMP underwriters. Notwithstanding these results, the more interesting findings are the relationships within each of these pools. In the LMP pool of underwriters, financially stronger firms used the larger LMPs to underwrite their bonds, while the weaker firms used smaller LMPs. In contrast, among HMP underwriters, the largest HMPs aligned with the firms of relatively lower financial strength. The relationships in both pools reverse when changes in financial strength are examined. Larger LMPs are associated with greater issuing firm financial decline while larger HMPs correlate with lower levels of decline in firm financial strength. Divergent patterns in initial underwriter-issuer matching and underwriter certification found in this research indicate that there are true differences in the “small” underwriting syndicates as compared to the larger syndicates. These patterns should be considered by both issuing firms and investors as both constituencies contemplate the corporate bond market