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Does social capital matter in underwriter's fees?

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  • Abakah, Alex Annan

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.

Suggested Citation

  • Abakah, Alex Annan, 2024. "Does social capital matter in underwriter's fees?," Global Finance Journal, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:glofin:v:62:y:2024:i:c:s1044028324000772
    DOI: 10.1016/j.gfj.2024.101005
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    Keywords

    Social capital; Trust; Information sharing; Information asymmetry; underwriter's risk-bearing; Underwriting spread;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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