Information Dissemination or Collusion: Embedded Underwriters and Bond Issue Pricing

ABSTRACT We explore the role of underwriters embedded in relationship networks in nascent capital markets. Using a sample of bonds issued by Chinese listed companies from 2016 to 2022, we find that lead underwriters with business and geographic ties to the issuers can reduce initial bond yield spreads. Greater underwriter embedded intensity in issuers' relationship networks is associated with lower bond yield spreads. This association is attributable to the information dissemination effect of embedded underwriters, and potential collusive behaviour has been suppressed by strengthened regulation. Further analyses reveal that the source of this information advantage is that the embedded underwriters obtain more proprietary information from the issuers, and are better able to interpret the public information. In the long term, underwriter embeddedness also reduces issuers' ex post default probability. Collectively, our study explains the information advantages of embedded intermediaries and demonstrates the governance function of financial regulation in capital markets with imperfect institutions.