Underwriter Capabilities, Guarantee Factors, And Issuing Spread: Evidence From China’s Corporate Bond Market

Corporate bond market has been developing fast in recent years. Yet comparedwith the mature market in Western countries, China’s corporate bond market hasmany unique characteristics. For example, guarantees and underwriter factors mayplay a different role in China from other countries. Some kinds of not so effectivebond guarantees are widely used, such as parent company guarantees; yet underwriterfactors may matter as bigger and more prestigious underwriters not only own greaterunderwriting capability and more funding advantage, but also are willing and able toattract good issuers whose bonds are less risky, consistent with signaling mechanism.So this paper would like to use empirical data to test the above conjectures in China’scorporate bond market, what kinds of guarantees are valued by investors, and whetherissuers can lower their cost by choosing a good underwriter.The results of empirical study show that underwriter factors do matter in thedetermination of issuing spreads: the bigger the underwriter is, the more market shareit has, or the fewer proportion of bonds the security company used to underwrite havebeen down-rated, the lower the issuing spread will be; Conversely, all kinds ofguarantee forms are viewed as ineffective by investors, not significant enough tolower yield spreads when underwriter factors are present, regardless of guarantor’scredit rating or financial sensitivity to issuer.In summary, in order to save issuing costs, I suggest the companies that plan toissue corporate bonds to choose a good underwriter, i.e. a big one with strong marketposition, or with few bonds underwritten that are later down-rated. As for guaranteechoice, if cost-saving is the only initiative for the issuer to obtain guarantees, then thecompany can choose not to have any guarantee if conditions allow.