Foreign Entry into Underwriting Services : Evidence from Japan's 'Big Bang' Deregulation

We examine the impact of foreign underwriting activity using issue-level data in the Japanese quot;Samuraiquot; and euro-yen bond markets. We find that firms in these markets choosing Japanese underwriters over their foreign counterparts tend to be Japanese, riskier, smaller, seasoned, and collateralized. We then examine the determinants of underwriting fees. While our data confirms that Japanese underwriters charge higher fees and spreads on average, we find that the fees charged by Japanese underwriters are actually lower after conditioning for issuer characteristics. Still, using the switching regressions technique, we find that firms tend to choose the proper nationality of underwriter, in the sense that switching from a Japanese underwriter to a foreign one, or vice versa, would be predicted on average to result in an increase in underwriting fees. Finally, we examine the impact of the 1996 liberalization of foreign access to the quot;Samuraiquot; bond market. We conduct a matching exercise, using yen-denominated issues in the euro-yen market as a control sample. We find that allowing entry by foreign underwriters led to a statistically and economically significant decrease in underwriting fees in the Samurai bond market, with our point estimates indicating that the spreads faced in that market fell by an average of 23 basis points. Overall, our results suggest that these markets are partially segmented, as issuers appear to have preferred underwriting habitats, but entry by foreign underwriters does increase market competition