A Study Of Embedded Underwriters And Their Economic Consequences

The characteristic of relationship-based transactions of Chinese enterprises has an important impact on the characteristic of information transmission of Chinese enterprises.For enterprises that more rely on relationship-based transactions,there will be more proprietary information,such as the information of business secrets or political connections,in their daily operating activities these are hard to disclose or unwilling to disclose to the outside,but these proprietary information are important to reflect the real business situation of the enterprise.Moreover,even if these proprietary information with strong personality attribute is disclosed to outsiders,it is difficult to be understood or verified by the other parties out of the specific relationship.The transmission problem of such proprietary information will be more serious when enterprises seek financing from the external capital market,for example,the booming bond market since this century in China: on the one hand,enterprises want to enjoy the financing convenience of the external capital market;on the other hand,the enterprises have to meet the higher disclosure requirements of the external capital market.Therefore,around the transmission of proprietary information,there are two important problems that need to be solved:(1)what enterprises need to solve is,how to reliably transfer the soft information related to the valuation of enterprises without disclosing proprietary information publicly,so that external investors or other outside relevant stakeholders can accurately understand and believe the information;(2)what the intermediary institutions which helping enterprises to transfer the information need to solve is,how to better understand and verify the proprietary information that the enterprise wants to transfer,and then accurately transfer the verified information to the public,so as to better fulfill its role of information intermediary.There has been a good discussion for the first problem in some studies,the research thinks that enterprises can use the connected intermediaries to transfer the proprietary information,for example,using the connected analysts to disseminate the proprietary information which has been verified by connected analysts.While,the current researches have not given much discussions on the problem about how the intermediary institutions can better fulfill the role of information intermediary to help enterprises disseminate or transfer the proprietary information.However,there needs more attention to the fact that,under the institutional background of relationship-based transactions,the information transmission characteristic of Chinese enterprise makes the role of the intermediary agencies which help enterprises to transmit information play a significant difference from that of the intermediary agencies in western mature capital market.According to the theory of financial intermediary based on the mature capital market in the west,the independence of intermediary institutions is an important guarantee for the authenticity and objectivity of information transmission.While,under the institutional background of relationship-based transactions,the information transmission involves more proprietary information,so the most valuable capability for information intermediaries is that they can be embedded in the social networks where the enterprise is located,and can deeply understand the essence of the various relationship-based transactions.This embeddedness is helpful for information intermediary to acquire,understand and verify the proprietary information,and then the information intermediary can truthfully and accurately to transmit the proprietary information as "hard" information to the public.Therefore,using the unique setting of China's bond market,and from the perspective of the most important information intermediary in the bond market--the main underwriter,this paper studies the influencing factors and economic consequences of the embedded underwriters under the institutional background of China's relationshipbased transactions.In the research of the influencing factors for embedded underwriters,concerning the availability of the measurement data of the characteristic of enterprise relationshipbased transactions,the listed companies which publicly issued corporate bonds from2007 to 2018 were taken as the main research samples.From the perspective of the relational cooperation between the project members of the lead underwriter and the bond issuer,as well as the relational cooperation between the project members of the lead underwriter and the bond raters,this dissertation investigates the influence of the relationship-based transaction characteristic of the issuer on the relational cooperation characteristic of the lead underwriter.The research shows that,when issuers rely more on relationship-based transactions and show typical characteristic of relationship-based transactions,the lead underwriters and issuers or bond raters also show more relational cooperation characteristic,specifically,the underwriters have more past cooperations with the issuer or the bond raters.The empirical results show that,the issuers tend to choose familiar underwriters as the lead underwriters when they rely more on relationship-based transactions,and the lead underwriters tend to team up with familiar bond raters in bond issuance;furthermore,underwriters' reputation may serve as the governance mechanism for the embedded underwriters whom are embedded in the networks of the issuers or bond raters to gain trust form the outside investors.The further research shows that,when the bond size is larger or the financing constrain faced by the issuers is greater,the positive relationship between the issuers' relationshipbased transaction characteristic and the underwriters' relational cooperation characteristic is more pronounced.The reason may be that,when the bond size is larger or the financing constrain is greater,the bond issuers' information transmission demands are greater and the direct benefits form the embedded underwriters are greater.In order to further study the information intermediary effect of embedded underwriters on enterprises which rely more on relationship-based transactions,the impact of external information environment on the relationship between the issuers' relationship-based transaction characteristic and the underwriters' relational cooperation characteristic is also tested The results show that,when the external information environment is worse,such as,the regional marketization level is lower and the degree of policy uncertainty is higher,the positive relationship between the issuers' relationship-based transaction characteristic and the underwriters' relational cooperation characteristic is more pronounced.The reason is that,when marketization level is lower or policy uncertainty is higher,there are less comparable or reference information for the companies which rely more on relationship-based transactions in the open market,it will be more difficult for the outside investors to understand or verify the proprietary information,in this situation,the embedded underwriters will be more needed to help the issuers to disseminate the proprietary information.In the research of the economic consequences of embedded underwriters,corporate bonds issued in the inter-bank market and corporate bonds publicly issued in the Shanghai or Shenzhen Stock Exchanges from 2007 to June 2019 were taken as the main research samples.From the perspective of the relationship between the project members of the lead underwriter and the bond issuer,as well as the relationship between the project members of the lead underwriter and the bond raters,the impact of the underwriters' relational cooperation intensity on the bond credit rating and the credit spread was investigated.It found that the stronger the relationship between the lead underwriter and the issuer or the bond rater,the higher the bond's credit rating and the lower the bond's credit spread.In order to distinguish the “information channel”hypothesis and the “collusion” hypothesis about the economic consequences of embedded underwriters,the further research found that the stronger the relationship between the lead underwriter and the issuer or the bond rater,the less likely the bond will be default in the future and the less likely it will be downgraded in the future.The study also finds that the embedded underwriters can significantly improve the information content of bond rating,moreover,the promotion effect of embedded underwriters on the information content of bond rating is more significant in the samples with higher reputation of the lead underwriters.,it shows that the reputation mechanism of underwriters plays an important role in the role of information intermediary of embedded underwriters.In addition,it also finds that the promotion effect of embedded underwriters on information content of bond rating is more significant in the samples with lower regional marketization level and higher policy uncertainty,these finds indicate that when the external information environment is worse,there are less comparable information of issuers in the public capital market,and it is more difficult for outsiders to understand and verify the proprietary information of issuers,in such situation,the embedded underwriters play a more important role in improving the information content of bond rating,and their information intermediary role in capital market is more prominent.