J 1468-2443 2010 01111 X

International Review of Finance, 10:2, 2010: pp.
149–183
DOI: 10.1111/j.1468-2443.2010.01111.x
Has the US Bond Market Lost its

Edge to the Eurobond Market?n
STAVROS PERISTIANI AND JOÃO A. C. SANTOS
Federal Reserve Bank of New York, New York
ABSTRACT
The growth of the European financial markets, together with the new, stricter
regulations on the US financial markets, has spurred a debate over the
competitiveness of the US financial markets. In this paper, we contribute to
this debate by investigating the relative competitiveness of the US bond
market over the last 10 years. In the early 1990s, the gross spread in the US
bond market were significantly lower than in the Eurobond market. While
this spread continued to decline in the US bond market, it declined at an
even faster rate in the Eurobond market, to the point of eliminating the wide
cost differential that existed between the two markets in the early 1990s.
These findings are robust and suggest that the relative costs of bond
underwriting declined in the Eurobond market. We also find that US firms
are increasingly opting to issue their bonds in the Eurobond market, and that
this relocation is partly driven by the decline in the relative gross spreads in
the Eurobond market. This finding adds support to our conclusion that the
cost of bond underwriting declined faster in the Eurobond market,
reinforcing the view that the US bond market is facing a greater challenge
from the Eurobond market.
I. INTRODUCTION
The deregulation trend that characterized the US financial system in the 1980s
and 1990s came to a halt with the enactment of the Sarbanes–Oxley Act (SOX)
in 2002.1 This change together with the transformation of the European
financial markets that followed the introduction of the euro in 2002 has spurred
a debate on the competitiveness of the US financial markets. This debate has
focused on the competitiveness of US equity markets.2 In this paper, we
n
The authors thank an anonymous referee, Darius Miller and seminar participants at the
Federal Reserve Bank of New York, the conference ‘Global Market Integration and Financial
Crises’ jointly organized by the Center for Asian Financial Markets at HKUST and the
International Review of Finance for useful comments, and Sarita Subramanian for her research
assistance. The views stated herein are those of the authors and are not necessarily those of the
Federal Reserve Bank of New York, or the Federal Reserve System.
1 The SOX was designed to ensure better corporate governance and shareholder protection.
2 Engel et al. (2007) and Leuz et al. (2004) find that after the passage of SOX, a fraction of US firms
abandoned the public markets. A study by Doidge et al. (2007), however, does not find evidence
that SOX has adversely affected cross listings on US stock exchanges.
r 2010 The Authors. Journal compilation r International Review of Finance Ltd. 2010. Published by Blackwell
Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
International Review of Finance
contribute to this debate by investigating the relative competitiveness of the US

bond and Eurobond markets over the last 10 years.
In the decades that followed the enactment of the Glass–Steagall Act in 1933,
which separated commercial banking from investment banking in the United
Stares, firms on both sides of the banking business seemed to lack the incentive
(or the ability) to combine both businesses. Since the 1960s, however,
commercial banks and investment banks tried to expand their activities into
each other’s strongholds. As a result, in 1988 the Federal Reserve started to allow
bank holding companies to offer corporate bond underwriting services through
their so-called Section 20 subsidiaries.3 This deregulation process culminated
with the enactment of the Gramm–Leach–Bliley Act in 1999, which repealed
the Glass–Steagall Act.
Commercial banks’ entry in the corporate bond underwriting business led to
a reduction in the costs of bond underwriting in the US bond market, making it
more attractive to corporations worldwide. Gande et al. (1999) link the overall
reduction in bond gross spreads for domestic US bonds to the competitive
impact from the entry of commercial banks in the business.4 The arrival of
commercial banks in the investment banking business also made it possible for
bond issuers to benefit from potential economies of scope resulting from the
combination of lending and underwriting activities.5 Yasuda (2005) and
Drucker and Puri (2005) find that bond issuers earn a significant fee discount
when they have a lending relationship with their underwriters.
During the same time period, the US bond market, however, was increasingly
subject to the competition from the Eurobond market. The liberalization of the
financial sector and the advent of the euro brought about a major transforma-
tion to the European financial system.6 Besides eliminating all uncertainty
relating to exchange rate risk in the choice of securities denominated in the
legacy currencies, the euro relaxed a number of regulatory restrictions on the
currency exposures of institutional investors in the euro area.7 The euro also
mitigated the influence of less formal restrictions, such as the so-called ‘prudent
3 To ensure that these subsidiaries met the requirements of Glass–Steagall, these subsidiaries
continued to be subject to a set of restrictions, including a requirement that the revenue
generated by ‘ineligible’ activities could not exceed 10% of the subsidiary’s total revenue. This
revenue limit was subsequently raised to 25% and the set of permissible activities expanded.
4 Roten and Mullineaux (2002), however, conclude that the effect of commercial bank entry on
bond gross spreads was transitory after examining a data set spanning a longer period.
5 A bank that provides commercial banking services to a borrower would find it easier to
underwrite the firm’s securities as it could use the information it has accumulated over the course
of its relationship with the firm. See Kanatas and Qi (1998) for a formalization of this argument,
and Rajan (1996) and Santos (1998) for other potential benefits for a firm from relying on its
bank lender for underwriting services.
6 For a detailed overview of the effects of the euro on the European financial markets, see Danthine
et al. (2001) and Galati and Tsatsaronis (2003).
7 These restrictions include currency-matching requirements that put a ceiling on the permissible
mismatch in the currency denomination of assets and liabilities, and portfolio allocation rules
that further restrict these investors’ ability to allocate funds in foreign securities.
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150 Journal compilation r International Review of Finance Ltd. 2010
Has the US Bond Market Lost its Edge to the Eurobond Market?
man’ rules, that reinforce the well-documented tendency of investor portfolios

to be overweight in domestic assets. Lastly, the erosion of rents derived from
local expertise in research and marketing reduced the economic barriers to
entry for investment houses from outside the euro area. As a result, a more
homogeneous capital market, in which firms faced an expanded investor base
and underwriters could compete more easily on a pan-European basis, emerged
in the post-Economic Monetary Union (EMU) period. Further, it became less
costly to access this market. According to Santos and Tsatsaronis (2003),
following the introduction of the euro, there was an important reduction in the
costs of bond underwriting in Europe.
These developments in the European financial markets appear to have
impinged on the US bond market as it lost a substantial market share to the
Eurobond market over the last 10 years. In 1995, the volume of corporate
issuances in the US bond market totaled US$564 billion, roughly double the
volume originated in the Eurobond market. This wide gap in issuances has
vanished, as the US$1.8 trillion volume of corporate issuances in the Eurobond
area in 2006 is greater than the US$1.5 trillion volume offered in the US bond
market. In this paper, we investigate if this massive shift in bond underwriting
was due to a shift in the relative competitiveness of the US bond market and the
Eurobond market. To that end, we first compare the gross spreads in the US
bond market and the Eurobond market over the 1995–2006 time period. Next,
we investigate if the changes we detect in the relative gross spreads affected US
firms’ choice of market in which to issue their bonds.
Our analysis shows that in the early 1990s gross spreads in the US bond
market were significantly lower than those paid on a comparable corporate bond
issued in the Eurobond market. Our analysis also shows that these spreads have
declined continuously in the US market over the last decade, but they declined
at a faster rate in the Eurobond market to the point of eliminating the difference
that use to exist between the two markets. These findings are robust to a variety
of bond-, firm-, and underwriter-specific characteristics. Further, the conver-
gence in underwriting costs does not appear to be driven by sample selection
and firm survival, as we also find this convergence on a sample of issuers that
maintain a constant presence in both markets over time. These results suggest
that the competitive wedge that the US bond market used to enjoy in
connection with its lower underwriting costs has to a large extent disappeared.
Our investigation of US firms’ choice of bond underwriting market reveals
that these firms are increasingly choosing the Eurobond market instead of the
US bond market. Importantly, our results show that this relocation toward the
Eurobond market is partly driven by the decline in the relative gross spreads in
the Eurobond market. This finding adds further support to our interpretation
that the decline in the relative gross spreads in the Eurobond led to an
improvement in the relative competitiveness of this market vis-á-vis the US
bond market.
The remainder of the paper is organized as follows. Section II provides a brief
overview of the structure of the US bond and Eurobond markets. Section III
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Journal compilation r International Review of Finance Ltd. 2010 151
presents our methodology. This section also lists our data sources and describes
our sample. Section IV investigates the evolution of gross spreads in the two
markets over the last decade. Section V investigates if changes in the relative
gross spreads in these markets affected US firms’ choice of bond underwriting
market. Section VI concludes with some final remarks.
II. THE US AND EUROBOND PRIMARY CORPORATE MARKETS
To better understand the evolution of the underwriting costs in the US bond

and Eurobond markets, this section provides a broad overview of the
institutional structure of these large global markets. Our study focuses on these
two bond markets because they have been by far the largest and most viable
sources of debt financing for internationally active American and foreign
companies.
The US corporate bond market is a crucial source of financing for large and
mid-size firms. US firms use this market extensively to raise funds as well as
many foreign firms (Yankee bonds). Corporate bonds issued in the US bond
market that are to be sold to investors are required to register with the Securities
and Exchange Commission (SEC). Corporations can also obtain financing in
the US bond market by issuing privately placed securities that are restricted to
qualified institutional investors (typically large pension funds and insurance
companies) and high-net worth investors.
Rating agencies together with underwriters play a critical role in the bond
issuance process used in the US bond market by assessing the creditworthiness
of each issuer. Credit ratings are critical in pricing these securities and
determine an important segmentation of the US bond market into the
investment-grade market and the below-grade market. With respect to under-
writing banks, they are important because they perform all of the logistical
details of issuing the security. Most underwriters in the US bond market offer
issuers the convenience to buy outright their security deal (the so-called
‘bought deal’ method). For this array of services underwriters are paid a fee or
gross spread, which is determined according to fixed-price rules. According to
this standard, fees are not paid directly but are instead established as a spread to
a benchmark. All members of the underwriting syndicate are obligated to sell
the offer at the same price determined by the lead underwriter, for which they
receive a commission. As we will elaborate in the next section, underwriter fees
are determined primarily by issuer characteristics and by bond features.
The definition of the Eurobond market has evolved over the years. This
market was developed to accommodate the surplus of US dollars that began to
accumulate overseas in the 1950s. The growth of this market was further
boosted by legislation discouraging foreign firms from issuing in the US bond
market. In particular, the enactment of the Interest Equalization Tax Act of 1963
raised financial costs for foreign issuers in the US capital markets. Although this
legislation was repealed in 1974, the Eurobond market had by that time the
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impetus to continue to prosper. Before the establishment of the European EMU,

a Eurobond represented a bearer security offered by issuers domiciled in any
country but issued in other than the country’s currency. Typically, Eurobonds
were underwritten by an international syndicate of banks. These securities were
not subject to national regulation. They were usually unsecured, and their
interest was exempted from taxes. In contrast to Eurobonds, ‘foreign bonds’
were issued in the various domestic markets in the country’s currency and were
subject to all home rules and regulations. With the arrival of the euro, the
currency distinction declined in importance because the euro became the
common denominator for many European issuers. At the same time, interest in
foreign bonds declined rapidly as most of these international issues started to be
offered in the Eurobond area.
Consistent with US practices and regulations, Eurobonds are also segmented
into high-yield and investment-grade sectors. These standards were carried over
to Europe by Moody’s and Standard and Poor’s. Also, as in the US bond market,
issuers in the Eurobond market rely on underwriters to manage the bond
offering. For the most part, underwriters in these markets have similar roles
(draft the prospectus and other required documents, form a syndicate, market
the bond to investors, handle fiduciary responsibilities, price and sell the issue
to clients). Consistent with US bond underwriting practices, almost all
Eurobonds use the ‘bought deal’ method.8 Lastly, the fee structure for bond
offerings in the Eurobond market is also determined as in the US bond market
according to fixed-price rules.
This apparent uniformity in bond offering practices facilitates a direct
comparison of the underwriter fees across the two markets. Such a comparison
may have been a bit more difficult in the 1980s, however, because back then
underwriting fees in the Eurobond area may have not been determined
according to fixed-price rules. The earlier literature on investment banking has
noted this difference often pointing to the practice of rebating in the Eurobond
market (see Levich 1985). This practice of returning some of the underwriting
fees to issuers and investors could potentially distort the true cost of
underwriting reflected by the gross spread measure. While rebating was perhaps
a more customary practice in the 1980s, the use of many of these traditional but
outmoded practices has vastly diminished. Throughout the 1990s, the
European financial markets underwent a major transformation, triggered by
financial liberalization and bank disintermediation. As a result, European
markets have liberalized their practices relying on more effective market-based
approaches. According to Smith and Walter (2003), since 1989 most of the
issues in the Eurobond market ‘have been offered in the American fixed-price
manner to effect better institutional distribution’ (p. 63).
8 The most common alternative is the ‘best efforts’ commitment, in which the underwriter does
not fully pledge to ex ante buy the offering. Under this method, there is a price discovery period
following the announcement of the issue after which demand is established and the final
allotment occurs.
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This convergence in the practices used in the US bond and Eurobond markets
was accompanied by a convergence in the structures of these markets. As we
noted in the introduction, with the repeal of Glass–Steagall Act, commercial
banks could return to the business of investment banking in the United States
thereby increasing competition in the bond underwriting business. This also
allowed bank underwriters to exploit potential scope economies between
lending and underwriting and thus offer bond underwriting services at lower
fees.
Even though, historically universal banking was common in Europe, before
the introduction of the euro, the Eurobond market was mostly segmented
according to local currency. The presence of these currency-based bond markets
benefited local European underwriting banks that were able to garner more
lucrative underwriting fees. The advent of the euro eliminated many of these
competitive frictions by allowing the entry large reputable US and other
international investment banks (Santos and Tsatsaronis 2003; Kollo 2005). The
increased competition and the loss of market power by Eurozone underwriters
helped drive competition in fees.9 The adoption of the euro also eliminated
many of the home bias incentives of European institutional investors (pension
funds and insurance companies) that were required to predominately hold
domestic assets in their portfolio holdings. As these institutional investors were
no longer currency-constrained, they could buy securities across the entire
spectrum of Eurozone countries increasing the depth of the demand for bonds
and making it easier for underwriters to exploit potential scale economies.
The transformation of the US bond and Eurobond markets improved
operational efficiencies among underwriters, promoting greater integration
and competition. Enhanced competition among underwriters over this period
has helped to lower the cost of bond underwriting in these markets. Our paper
investigates more closely the decline in underwriting costs in these two markets
and attempts to ascertain if there was a change in the relative competitiveness
of these two markets over this period of time.
III. METHODOLOGY, DATA AND SAMPLE CHARACTERIZATION
A. Methodology
Our methodology has two parts. The first part investigates the costs of bond
underwriting in the US bond and Eurobond markets over time. The second part
9 Issuers in the post-EMU period also were less constrained in selecting an underwriter with
experience in placing bonds in euros than they were in the case of bonds issued in one of the
legacy currencies. In particular, they became less constrained to select as underwriter a bank with
which they had a business relationship. Before the euro, issuers wishing to tap a foreign market
would find it advantageous to select an underwriter with sales expertise in the currency of issue.
This usually meant selecting an underwriter from the country of the currency of issue, as
opposed to a bank from the borrower’s home country.
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investigates whether the change in the relative costs of issuing in these markets
over time has affected US firms’ bond market choice. Below, we outline the
models we use to formally analyze each of these issues.
i. The cost of bond underwriting in the US bond and Eurobond markets

We start our analysis of the evolution of the costs of bond underwriting in the
US bond and Eurobond markets by estimating the following model of gross
spreads for each market:
0 0
GROSS SPREADijt ¼ ai þ b TIME TRENDt þ Bijt c þ Fijt g
0 0
þ Uijt m þ Oijt Z þ eijt ð1Þ
where GROSS SPREADijt is the underwriting spread of bond j issued by firm i in
year t, measured as the difference between the offered amount and the proceeds
to the issuer, expressed as a percentage of the offered amount (issue size). The
gross spread variable is a commonly used measure of the costs of bond issuance
paid to underwriters. To investigate if the cost of bond underwriting varied over
time, we include TIME TREND – the log of the time trend – to our model of gross
spreads. This is our main variable of interest as it indicates how the cost of bond
underwriting changed over time in the market. In some specifications, we replace
this variable with time dummies to facilitate the comparison between the costs of
bond underwriting in the US bond and the Eurobond markets over time.
We investigate the gross spreads in these markets controlling for a set of
bond-specific variables, B, known to affect the cost of bond underwriting.
Because the credit quality of the borrower affects the ability of its underwriter to
successfully place the offer, we control for several variables that measure the
riskiness of the bond issuer. To that end, we control for the credit rating of the
bond. To better capture the potential nonlinear effects of the ratings on
underwriting costs, we use a set of dummy variables, one for each rating of the
bond. To reduce the number of explanatory variables measuring credit risk, we
use only whole ratings. We also control for a set of covenants that affect bond
risk. We distinguish bonds that are senior (SENIOR), bonds that have a sinking
fund (SINK FUND) and callable bonds (CALLABLE). In addition, we distinguish
bonds issued under Rule 144A (RULE144A), and control for the maturity of the
bond (MATURITY) and for the size of the issue (AMOUNT). Longer maturity
bonds tend to be riskier, but they are often issued by safer firms and so the effect
of this variable on gross spreads is unclear. With regards to the size of the issue,
larger issues are usually offered by bigger and more diversified corporations.
Further, there may be economies of scale in the underwriting business.
Therefore, we should expect larger issues to pay lower gross spreads.
We complement these bond controls with a set of firm-specific variables, F.
We use the dummy variable NONFINANCIAL to distinguish between financial
and nonfinancial firms. Given that there may be systematic differences between
these two types of firms, we also re-estimate our models for the subset of
nonfinancial firms alone. Because publicly listed firms are more transparent to
investors, we include in our model a dummy variable identifying the public
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status of firms PUBLIC. Lastly, we control for the firm’s industry as defined by its
1-digit SIC code because each industry may face additional risks that are not
captured by the list of control variables presented above.
The next set of variables controls for features of the bond underwriter and for
the underwriting syndicate, U. Because larger syndicates are better able to
diversify the risks of issuance, we control for the number of underwriters in the
syndicate (UNDERWRITERS). Similarly, because larger underwriters are better
positioned to absorb these risks, we control for the market share of the
underwriter(s) in the syndicate (UNDERWRITER SHARE).10 Larger underwriters
may also be able to issue bonds at a lower cost because they are usually
perceived to be more reputable.11 Financial firms often manage their own bond
issues, typically underwriting debt for themselves or for one of their
subsidiaries. We distinguish these issues through the dummy variable (SELF
MANAGED). Lastly, to account for potential synergies between lending and
bond underwriting, we control for these relationships by including in our
model of gross spreads the dummy variable LOAN–RELATIONSHIP that takes the
value 1 if the bond underwriter has also served as a loan arranger to the issuing
firm over the 5-year period before the bond offering.12
Finally, we control for a set of variables, O, that are unrelated to the issuer, the
bond and the underwriting syndicate, but which can still potentially affect bond
underwriting costs. For instance, we control for the currency denomination of the
bond. We also control for the bonds issued during the 2001 recession in the
United States, as the additional burden of placing bonds during recessions may
lead underwriters to demand a higher compensation from issuing firms.
We add our three sets of controls sequentially because some of the variables
in these sets may be jointly determined with the bond’s gross spreads. To better
capture the firm variation in gross spreads, we estimate our models both with a
pooled regression and with firm-fixed effects, but we will focus our discussion
on the latter results. In addition, we estimate our model of gross spreads for
various subsamples to address potential sample selection biases. For instance,
because the sample of issuers changes over time, we estimate our model
including only issues of firms that were active in the bond market in the earlier
part of the sample period. Because some of these firms drop out of the market at
a later date, we re-estimate our model limiting the sample to bonds issued by
10 The market shares represent the fraction of bond underwriting business sponsored by the lead
bond underwriter bank in the year before the date of issue.
11 Livingston and Miller (2000), Yasuda (2005) and others find that investment banks with a larger
market share charge lower bond underwriting fees.
12 Yasuda (2005), for instance, finds that firms that have closer lending relationships with their
bond underwriters pay lower gross spreads. To determine the presence of a lending relationship,
we first matched the name of bond issuer to the name of the borrower in the LPC’s Dealscan
database. From this initial match, we are able to establish whether the bond issuer had also
borrowed in the syndicated loan market before the bond offering. Subsequently, the names of
bond underwriters are matched to the lead managers of the loan syndicate. This step establishes
the actual presence of lending relationship between the issuer and the bond underwriter, albeit it
is only confined to syndicated loans.
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firms that were present in the market both at the beginning and at the end of our
sample period. Further, because there may be potential systematic differences in
the set of firms that issue in the US bond and Eurobond markets, we re-estimate
the gross spread specifications using the aforementioned subsamples with the
additional condition that firms must have issued in both markets.
ii. Bond underwriting costs and firms’ market choices

The tests in the first part of our methodology implicitly assume that the gross
spread accurately measures underwriting costs in the US bond and Eurobond
markets.13 Nonetheless, to reduce concerns that our evidence on the relative
gross spreads in the two bond markets over time did not affect the relative cost
of bond underwriting in these markets, in the second part of our methodology,
we investigate if the relative gross spread between the US bond and the
Eurobond markets played a role on US firms’ choice of underwriting market.14
We start by modeling firms’ choice of underwriting market. We use a two-
stage methodology to analyze the endogenous nature of the decision to issue in
either market. In the first stage, we estimate the shadow cost of what a bond
issuer (American or foreign firm) would pay if it issued in the US bond market or
the Eurobond market. To derive an estimate for the cost of issuing in each
market, we estimate a gross spread pricing model analogous to the model of
gross spreads presented in the previous section for each market. This gross
spread model includes many of the same controls considered above [equation
(1)], except for the controls related to the underwriting syndicate (U) because
this choice is not yet determined at this stage.15 From this first stage, we derive
an instrument for the average gross spread paid by a comparable US firm that
issued in the US bond market or the Eurobond market at time t. Using the
estimated shadow costs in the US bond and Eurobond markets, (GS cUS ) and
ti
c EU
(GSti ), respectively, we can define the relative gross spread ratio as follows:
US
c
GS ti
GSratio ¼ US EU
:
c þ GS
GS c
ti ti
Note that, by design, the gross spread ratio is between 0 and 1. A ratio greater
than 0.5 indicates underwriting costs are higher in the US bond market relative
13 Note that we could still rely on our tests if the gross spread captures only a portion of the
underwriting cost in each market, provided that these portions did not vary over time in a way
that offsets the relative decline in the gross spreads evidenced in our tests.
14 We limit this exercise to US firms because we have accounting information on these firms that we
can use to control for other firm characteristics that could help explain their choice of market to
issue their bonds.
15 To ensure that the forecasts of gross spread are always positive, we use a semi-log functional
specification for the first-stage estimation. This pricing model essentially proxies the ex ante cost
structure US firms face at the time they are considering to issue in the two competing markets.
Estimates for these underwriting fees are derived using a 5-year rolling period regression model.
For example, to derive a shadow price for company considering issuing bonds in 2000, we
estimate a gross spread regression model for the period 1995–1999.
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to the Eurobond area. In contrast, a ratio smaller than 0.5 signifies these costs
are higher in the Eurobond market.
The above specification is able to accommodate an extensive list of bond
features sought by issuing companies. It is generally able to compare the costs of
issuances across the two markets controlling for the most important factors
such as bond maturity, issue size and firm riskiness. The model also prices
individual bond features such as callability and seniority. Clearly, it is
impossible for any specification to capture other more esoteric features of the
bond that on occasion may interest issuers. The Eurobond market, for instance,
provides US borrowers access to different more unusual types of debt
instruments (e.g., perpetual bonds or specialized foreign currency-denominated
bonds). But these choices tend to be the exception rather than the rule. Thus,
our specification is able to compare and price most of the important features
that are traditionally considered by bond issuers in these two markets.
In the second stage, we use a logistic regression model to investigate if the
gross spread ratio (the instrument for shadow price), estimated from the first
step, affects US firms’ decision to issue either in the US bond market or in the
Eurobond market. More formally, this binary choice model is defined by
yti ¼ a þ bGSratio þ Xti g þ uti
where
yti ¼ 1 if yti Z 0 Firm issues in the US bond market
yti ¼ 0 if yti < 0 Firm issues in the Eurobond market
such that uti is white noise error. The dependent variable yti can be viewed as a
latent index of a borrower’s willingness to issue in the US bond market.
We examine the importance of the relative costs of issuance in US firms’
decision to issue at home or abroad controlling for a number of other factors X
that are likely to affect this decision. The self-regulated character of the
Eurobond market suggests that it will be easier for safer firms to access this
market. We account for the creditworthiness of the issuing firm in our logistic
model using a set of dummy variable indicators of credit rating. Firm size is also
likely to play a role in the bond market choice not only because larger firms
tend to be more diversified and thus safer, but also because their name
recognition is likely to make it easier to access the foreign market. We use issue
proceeds to proxy for firm size. The currency denomination of the bond issue is
also likely to affect the market choice. While it is possible to issue foreign
currency denominated debt in the US bond market, firms might find the
Eurobond market more amenable to foreign-currency debt because it is
dominated by large international institutional and foreign private investors
that have no qualms investing in their own currencies.
The Eurobond market is a good outlet for internationally active companies
seeking to hedge foreign currency exposures. One would therefore expect that
US firms that have a large network of foreign subsidiaries and receive a
significant fraction of their income from abroad to be more inclined to issue in
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the Eurobond market. To capture this potential desire to diversify the sources of
long-term funding, we include in the logistic regression a firm’s ratio of foreign
sales divided by total sales (domestic plus foreign).
Finally, following our previous specifications, we address concerns with sample
selection and survival issues, by estimating the logistic model for the entire set of
US issuers and for the subset of US firms that maintained a more permanent
presence issuing both at the beginning and the end of the sample period.
B. Data
We use Thomson Financial Securities Data Corporation (SDC) Global New
Issues database to gather data on corporate bond issuance in the US bond and
the Eurobond market. Our analysis focuses on the US bond and the Eurobond
markets because these markets are the most important source of bond financing
for internationally active US and foreign companies.
We use the Loan Pricing Corporation’s (LPC) Dealscan database to identify
the firms in our sample that borrow from their bond underwriters, and based on
this information identify their bank lending relationships. Finally, we rely on
the Bureau van Dijk Osiris database to get information on the distribution of US
firms’ foreign and domestic sales, which is used to proxy for firms’ activity in
foreign countries.
C. Sample characterization
Our sample includes all corporate bonds issued in the US bond and Eurobond
markets between January 1, 1995 and December 31, 2006. We exclude from our
sample all bonds with any convertible features, bank notes and asset-backed
securities.16 This sample period offers a long horizon to study the pre- and post-
EMU cost structure of the bond issuance. Moreover, this 12-year period
corresponds roughly to the time period during which commercial banks began
to actively compete with investment banks in securities underwriting both
domestically and in the Eurobond market.17
Table 1 summarizes the sample of bonds for the set of controls used in our
analysis of gross spreads. The left panel of the table compares bonds issued in
the US bond market with those offered in the Eurobond market. A comparison of
the two samples reveals that there are important differences between the two
16 Most of these specialized asset-backed issues, such as collateralized debt obligations (CDOs) and
collateralized loan obligations (CLOs), were offered in the less-regulated Eurobond market. The
total volume of asset-backed issues in the Eurobond market surged from US$45 billion in 2000 to
over US$700 billion by the end of 2006. By design, our sample does not include these structured
bonds as they do not represent a corporate issue.
17 The Federal Reserve gradually eased restrictions on bond securities underwriting activities for
banks starting in 1989. Initially, Federal Reserve rules restricted revenues from securities-related
activities to 10%. This ceiling was raised to 25% in 1996. The Glass–Steagall Act restrictions were
formally lifted with the enactment of the Gramm–Leach–Bliley Act of 1999.
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160
Table 1 Sample characterization
Variables All issuers Issuers with access to both US issuers with access to both
markets markets
US bond Eurobond Difference US bond Eurobond Difference US bond Eurobond Difference
NONFINANCIAL 41.17 22.03 19.14 20.58 13.89 6.69 20.03 16.00 4.03
PUBLIC 58.04 81.32 23.28 51.59 84.17 32.59 55.16 84.80 29.64
AMOUNT 315.98 229.80 86.17 366.77 263.33 103.45 363.92 267.94 95.99
MATURITY 7.50 7.27 0.23 5.89 6.06 0.17 5.81 5.78 0.03
CCC 0.35 0.05 0.30 0.07 0.00 0.07 006 0.00 0.06
B 4.55 1.37 3.18 0.97 1.03 0.06 0.73 0.76 0.03
BB 3.72 1.45 2.27 1.21 1.28 0.07 0.94 0.51 0.43
BBB 22.53 5.42 17.11 9.91 4.84 5.08 9.79 5.54 4.25
A 49.98 20.08 29.92 62.88 23.47 39.40 64.18 31.01 33.17
AA-AAA 16.92 42.47 25.55 23.96 53.35 29.39 24.00 55.37 31.37
RATING MISSING 1.94 29.18 27.23 1.00 16.04 15.03 0.30 6.81 6.51
RELATIONSHIP 76.24 59.16 17.08 89.06 71.04 18.02 92.01 75.10 16.90
UNDERWRITER SHARE 8.30 3.60 4.70 8.28 3.86 4.41 8.24 4.45 3.79
UNDERWRITERS 1.28 1.39 0.11 1.26 1.41 0.15 1.23 1.35 0.12
SELF MANAGED 10.85 7.34 3.51 19.49 11.15 8.34 22.57 21.60 0.97
Observations 15,223 23,175 8375 9011 7230 3157
NONFINANCIAL, dummy variable equal to 1 for nonfinancial issuers; PUBLIC, dummy variable equal to 1 for public issuers; AMOUNT, size of the
bond issue; MATURITY, maturity of the bond; CCC, B, BB, BBB, A and AA-AAA, dummy variables which equal to 1 for bonds with these ratings;
RATING MISSING, dummy variable equal to 1 for bonds for which the rating is missing; UNDERWRITERS, number of underwriters in the bond
syndicate; UNDERWRITER SHARE, market share of the lead bond underwriter(s); SELF MANAGED, dummy variable equal to 1 for underwriters that
issue debt for themselves or for one of their subsidiaries; RELATIONSHIP, dummy variable equal to 1 if the lead bond underwriter has also served as
a loan arranger to the bond issuer over a 5-year period before the bond offering.
Journal compilation r International Review of Finance Ltd. 2010

r 2010 The Authors
samples. The US corporate bond market has a larger share bonds issued by
nonfinancial firms and by private firms than the Eurobond sample. In contrast,
the Eurobond market has traditionally been the domain for top-rated large banks
and other financial issuers as these firms accounted for a large fraction of the
Eurobond volume during 1995–2006. The Eurobond market also has a higher
share of bonds rated investment grade. Much of the gap in ratings is again due to
the proliferation of financial issuers, such as banks, in Europe. To account for
these differences, we undertake our multivariate analysis both for the entire set of
bonds in our sample and for the bonds issued by nonfinancial corporations alone.
Looking at other dimensions presented in Table 1, we observe that the bonds
issued in the US bond market are larger and have a slightly longer maturity than
those issued in the Eurobond market. US issuers appear to rely more extensively
on the underwriters they have relationships with and on banks that have a
larger share of the market to place their bonds than Eurobond issuers.
Underwriting syndicates in the United States on average have fewer banks
than syndicates in the Eurobond market. Finally, the practice of banks
underwriting bonds for themselves (or their subsidiaries) seems to be more
prevalent in the US bond market than in the Eurobond area.
A more informative comparison for our purposes is provided by the analysis of
the constant sample of firms that have issued at least once in each market during
the sample period (middle panel), and the sample of US firms that have issued at
least once in both markets during the sample period (right panel). Comparing the
differences between these samples of bonds with the differences in the original
samples, it is apparent that as we shift our focus to the set of issuers with access to
both markets that the samples of bonds issued in the two markets become more
similar. Note that the absolute value of the differences computed in the middle
and right panels of the table are generally smaller than those reported in the left
panel of the table. This apparent convergence is important for our objective of
investigating the relative cost of bond underwriting in both markets because it
reduces concerns that our findings are attributed to sample selection biases rather
than to the competitive edge of each market over time.
Over the last two decades, the US-syndicated loan market experienced an
explosive growth peaking at about US$2 trillion in volume in 2007 before the
onset of financial crisis. The rapid growth of the syndicated loan in United
States, especially in leveraged lending, underscores the change in corporate debt
financing from bonds to lower costs loans. It is possible that the availability of
these attractive sources of financing would have also influenced the decision to
issue in the US bond market. However, the volume of syndicated lending in the
European market reached US$1.7 trillion in 2007. Syndicated lending is also a
formidable alternative source of funding for Eurobond issuers.
Admittedly, the growing presence of the leveraged market loan market both in
the United States and overseas is a complicating factor because it raises the
possibility of adverse selection over this time period. Arguably, with the
introduction of leveraged lending, riskier borrowers may have opted to abandon
the bond market, seeking instead financing from the cheaper leveraged loan
r 2010 The Authors

market. Thus, any reduction in the underwriting costs in the US bond and
Eurobond markets could be explained by an underlying shift in borrower
creditworthiness.
To compensate for this potential sample selection problem, Table 2 compares
the costs of bond underwriting in the US bond market and the Eurobond market
both at the beginning and the end of the sample period. Based on the results from
the top panel of the table, which considers all issuers in both markets, we observe
that at the beginning of the sample period, it was significantly more expensive to
issue bonds in the Eurobond market than in the US bond market. Still according
to that panel, even though underwriting costs declined significantly in both
markets, this gap did not appear to have affected the relative costs of issuing in
both markets. The results from the middle panel of Table 2, representing firms
that issued at least once in the two bond markets over the same period and thus
are less prone to sample selection effects, however, suggest a different conclusion.
Specifically, we observe that the costs of bond underwriting declined faster in the
Eurobond market than in the US bond market over the sample period. Thus, even
though by the end of the sample period it was still more expensive to issue in the
Eurobond market, the relative competitiveness of this market vis-á-vis the US
bond market has vastly improved.
The results presented at the bottom panel of Table 2, which focuses on the
subsample of US firms with access to both markets, further reinforce these
converging trends in underwriting costs. While the US bond market is still more
attractive than the Eurobond market in the sense that it offers lower underwriting
costs, it has lost some of its competitive edge over the last decade. It remains to be
seen if these univariate results continue to hold when we account for other factors
that determine the costs of bond underwriting and use a stricter sample selection
strategy that limits the analysis to the set of issuers with access to both bond
markets. We investigate these issues in the next section.
IV. UNDERWRITING COSTS IN THE US BOND AND

EUROBOND MARKETS
In this section, we discuss the regression results of our investigation on the relative
costs of bond underwriting in the US bond and the Eurobond markets over the
period going from 1995 to 2006. We first look at the underwriting costs in each
market separately and then compare them over time to ascertain whether there
has been a change in the relative competitiveness of the two bond markets.
A. Gross spreads in the US bond market

Table 3 reports the results of our model of gross spreads for corporate bonds
issued in the US bond market. The left panel reports the results for financial and
nonfinancial issues. The right panel focuses only bonds on nonfinancial issuers.
Each panel includes three specifications. The first model controls for the
r 2010 The Authors

Table 2 Gross spreads in the US bond and Eurobond markets over time
US bond Eurobond Difference t-Statistic
All issuers
First 3 years 0.827 0.935 0.107nnn 6.62
(Observations) (3528) (8078)
Last 3 years 0.453 0.562 0.109nnn 6.45
Difference 0.375nnn 0.373nnn 0.002
t-Statistic 18.40 20.27 0.07
All issuers with access to both markets
First 3 years 0.497 1.034 0.536nnn 23.57
(Observations) (1470) (3.047)
Last 3 years 0.308 0.573 0.265nnn 12.68
Difference 0.189nnn 0.461nnn 0.272nnn
t-Statistic 10.60 16.53 7.83
All issuers with access to both markets
First 3 years 0.440 0.992 0.551nnn 20.47
(Observations) (1227) (994) 20.47
Last 3 years 0.309 0.628 0.320nnn 12.60
Difference 0.131nnn 0.363nnn 0.232nnn
t-Statistic 7.44 8.62 8.97
First 3 years, sample limited to the bonds of those issuers that issued at least once during the first
3 years of the sample period (1995–1997); Last 3 years, sample limited to the bonds of those
issuers that issued at least once during the first 3 years and the last 3 years of the sample period
(2004–2006).
, ,
n nn nnn
indicate statistical significance at the 10%, 5%, and 1% levels, respectively.
Table 3 Gross Spreads in the US bond market

Variables All corporate issuers Nonfinancial issuers
1 2 3 4 5 6
L TIME TREND 0.044nn 0.051nnn 0.055nnn 0.109 0.106nnn 0.111nnn

(0.021) (0.018) (0.017) (0.020) (0.018) (0.018)
NONFINANCIAL 0.043 0.052 0.054
(0.082) (0.082) (0.082)
PUBLIC 0.045n 0.036 0.036 0.064nn 0.062nn 0.062nn
(0.026) (0.025) (0.025) (0.028) (0.028) (0.027)
L AMOUNT 0.050nnn 0.053nnn 0.052nnn 0.038nnn 0.034nnn 0.034nnn
(0.013) (0.014) (0.014) (0.014) (0.015) (0.015)
MATURITY 0.020nnn 0.020nnn 0.020nnn 0.012nnn 0.012nnn 0.012nnn
(0.002) (0.002) (0.002) (0.001) (0.001) (0.001)
CCC 0.884nnn 0.895nnn 0.897nnn 0.501nnn 0.507nnn 0.506nnn
(0.134) (0.133) (0.133) (0.147) (0.145) (0.145)
B 0.866nnn 0.864nnn 0.864nnn 0.488nnn 0.481nnn 0.478nnn
(0.098) (0.097) (0.097) (0.111) (0.110) (0.110)
BB 0.105 0.115 0.112 0.268nn 0.263nn 0.267nn
(0.110) (0.111) (0.110) (0.124) (0.123) (0.123)
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Table 3 (continued)
1 2 3 4 5 6
BBB 0.745 nnn

0.727 nnn
0.730 nnn
1.099 nnn
1.086 nnn
1.092nnn
(0.093) (0.092) (0.092) (0.111) (0.110) (0.110)
A 0.754nnn 0.734nnn 0.738nnn 1.127nnn 1.110nnn 1.116nnn
(0.097) (0.097) (0.096) (0.112) (0.111) (0.111)
AA-AAA 0.795nnn 0.775nnn 0.778nnn 1.076nnn 1.068nnn 1.074nnn
(0.095) (0.095) (0.095) (0.122) (0.120) (0.119)
SENIOR 0.170nnn 0.163nnn 0.162nnn 0.207nnn 0.204nnn 0.203nnn
(0.045) (0.045) (0.045) (0.051) (0.051) (0.051)
SINKING FUND 0.045 0.050n 0.045n 0.015 0.008 0.013
(0.028) (0.028) (0.027) (0.033) (0.033) (0.032)
CALLABLE 0.304nnn 0.299nnn 0.299nnn 0.238nnn 0.232nnn 0.231nnn
(0.036) (0.036) (0.036) (0.027) (0.027) (0.027)
RULE144A 0.120nnn 0.118nnn 0.116nnn 0.157nnn 0.146nnn 0.145nnn
(0.027) (0.028) (0.028) (0.027) (0.027) (0.027)
RELATIONSHIP 0.049nnn 0.048nnn 0.040nnn 0.040nnn
(0.014) (0.015) (0.016) (0.016)
UNDERWRITER SHARE 0.397 0.414nnn 0.544nnn 0.558nnn
(0.145) (0.146) (0.241) (0.233)
UNDERWRITERS 0.02 0.023 0.005 0.002
(0.014) (0.014) (0.016) (0.017)
SELF MANAGED 0.075n 0.074
(0.043) (0.042)
RECESSION 0.050n 0.046
(0.029) (0.044)
CONSTANT 1.326nnn 1.363nnn 1.375nnn 2.041nnn 2.084nnn 1.994nnn
(0.137) (0.135) (0.149) (0.206) (0.207) (0.224)
Observations 15,223 15,223 15,223 6268 6268 6268
R2 0.62 0.62 0.62 0.7 0.7 0.7
Models estimated with robust standard errors and clustered by firm to correct for correlation
across observations of a given firm. L TIME TREND, the log of time trend; SENIOR, dummy
variable equal to 1 for senior subordinated bonds; SINK FUND, dummy variable equal to 1 for
bonds that have a sinking fund; CALLABLE, dummy variable equal to 1 for callable bonds;
RULE144A, dummy variable equal to 1 for bonds issued under Rule 144A; MATURITY, maturity of
the bond; L AMOUNT, log of the issue amount; NONFINANCIAL, dummy variable equal to 1 for
bonds issued by nonfinancials; PUBLIC, dummy variable equal to 1 for bonds issued by public
firms; UNDERWRITERS, number of lead underwriters in the bond syndicate; UNDERWRITER
SHARE, market share of the underwriter(s); CCC, B, BB, BBB, A, AA-AAA, set of dummy variables
for bonds with the corresponding credit rating; SELF MANAGED, dummy variable equal to 1
when the underwriter issues debt for itself or for one of its subsidiaries; RELATIONSHIP, dummy
variable equal to 1 when the bond underwriter has also served as a loan arranger to the issuing
firm over a 5-year period before the bond offering; RECESSION, dummy variable equal to 1 if the
bond was issued during the 2001 recession. Included in the regressions but not shown in the table
are (i) a dummy variable to account for the bonds with a missing rating, (ii) dummy variables to
account for the currency of the issue and (iii) dummy variables to account for the sector of
activity of the issuer.
, ,
n nn nnn
r 2010 The Authors

characteristics of the issuer and those of the bond. The second model expands
this model to control for the characteristics of the underwriting syndicate.
Finally, the third model further accounts for the currency of the issue and
distinguishes the bonds issued during the 2001 recession.
Regardless of whether we consider bonds issued by financial and non-
financial firms or limit our analysis to bonds issued by the latter firms, and
irrespective of the model specification, we find that during the period under
investigation there was a decline in the gross spreads in the US bond market.
Our control for the cost of bond underwriting over time – the log of the time
trend – is negative and highly statistically significant in all of the models of
gross spreads. It appears, therefore, that the decline in the bond gross spreads
that Gande et al. (1999) detected with the arrival of commercial banks in the
investment banking business following the repeal of the Glass–Steagall Act
continued even after 2000 – the last year of their sample.
With respect to the coefficients of the control variables that we use in these
models, they are generally consistent with the discussion given in the
methodology subsection. Gross spreads are higher for risky bonds. Lower-rated
bonds and longer maturity bonds carry higher gross spreads. In contrast, senior
subordinated bonds and bonds that have a sinking fund have lower gross
spreads. Callable bonds and bonds issued under Rule 144A carry higher gross
spreads. There appears to be economies of scale in the underwriting business as
larger issues pay lower gross spreads. Our results also show that bonds issued
during recessions require higher gross spreads, possibly to account for the
higher risk that underwriters face to place bonds during downturns. Consistent
with Livingston and Miller (2000) and Yasuda (2005), our findings show that
larger investment banks charge lower gross spreads on the bonds that they
underwrite. We also find that the presence of lending relationship with the
underwriter lowers the gross spread the firm pays the underwriter. These results
are consistent with the findings of Yasuda (2005) and Drucker and Puri (2005).
According to our results, publicly listed firms pay lower gross spreads on their
bonds than privately held firms possibly because there is more information
available about them, which makes it easier for investment banks to place their
bonds. Lastly, our findings indicate that bonds underwritten by investment
banks for their own use carry a higher gross spread. This is a novel and
interesting finding. The cost premium paid on these self-underwritten bonds
could be the result of an internal price transfer or alternatively to compensate
the investment banking unit for the extra costs it will incur as a result of the
conflicts of interest inherent to these bond issues.
Before we turn out attention to the Eurobond market, we discuss briefly the
results of some robustness checks examining the decline of gross spreads in the
US bond market. The results presented above were obtained from pooled
regressions. To compensate for the potential implications of firm differences, we
re-estimated our model of gross spreads with firm-fixed effects. Further, to
account for the possibility that the decline in gross spreads is driven by an
improvement in the pool of issuers in the later part of the sample period, we
r 2010 The Authors

re-estimated our model of gross spreads on the subsample of bonds of firms that
issued at least once during the early part of the sample period.18 Lastly, because
the previous test does not guarantee a constant sample throughout the sample
period (some of the earlier issuers may not return to the market at a later date),
we re-analyzed our model of gross spreads by further limiting the sample to
bonds to those firms that issued both at the beginning and at the end of our
sample period.19 The results of these tests are reported in Table 4. As before, we
estimate these models for the entire sample of issuers and for the sample of
nonfinancial issuers alone. For the sake of brevity, we report the results only for
the model of gross spreads that includes all of our controls.
Looking at Table 4, and in particular, focusing on our main variable of interest –
the time trend – we find that this variable continues to be negative and strongly
significant in all of our robustness tests. Because we continue to find a decline in
the gross spread when we consider the entire set of bond issuers as well as the
samples we design to account for potential sample selection biases, then the
decline in the gross spread in the US bond market that we detected was likely
caused by the growing competition in the underwriting business and the
efficiency gains that underwriters have been able to generate over time.
B. Gross spreads in the Eurobond market

Table 5 reports the same set of models presented in Table 3, focusing this time
on corporate bonds issued in the Eurobond market.20 Similar to the US bond
market, regardless of whether we consider the entire sample of issuers or just
nonfinancial issuers, and notwithstanding the set of controls used in the gross
spread specifications, we document a considerable decline in the gross spreads
in the Eurobond market over the same time period. The time trend variable
used in these models is always negative and highly statistically significant. This
result extends Santos and Tsatsaronis (2003) who find that there was a
reduction in the costs of bond underwriting in the euro area in the 2 years
subsequent to the introduction of the euro. With respect to the remaining
controls, in general, they produce results that are similar to our findings based
on the US bond market.
In Table 6, we report the results of the same robustness tests done in the
US bond market for the bonds issued in the Eurobond market. A quick look at
18 We report the results when we limit our sample to bonds of those firms that issued at least once
during the first 3 years of our sample period. We have also considered alternative horizon
scenarios such as firms that issued in the first 2 or 4 years of the sample period and got similar
results.
19 As in the previous robustness test, we report the results when we limit our sample to bonds of
those firms that issued at least once during the first 3 and the last 3 years of our sample period.
We get similar results when we consider the 4-year windows; however, the sample becomes too
small when we consider the 2-year windows.
20 There is only a small difference between the sets of controls used in both tables – in the Eurobond
market there are no bonds issued with a sinking fund.
r 2010 The Authors

Table 6 reveals that the time trend continues to be negative and statistically
significant in all alternative robustness tests. Thus, the decline in the gross
spread in the Eurobond market identified above does not appear to be driven by
sample selection. Similar to the US bond market, competition and efficiency
improvements in the bond underwriting business seem to have lowered the
costs of bond underwriting in the Eurobond market over the last decade.
C. Which market became more competitive?

Given our earlier findings that the gross spreads declined in both the US bond
market and the Eurobond market, the natural question to ask is whether one of
these markets gained a competitive wedge during this period. Even though a
quick comparison of the time trends in the US bond and Eurobond markets
Table 4 Gross spreads in the US bond market: Further results

All years F3Years F-L3Years All years F3Years F-L3Years
L TIME TREND 0.014 n

0.018 nn
0.019 nn
0.048 nnn
0.047 nnn
0.056nnn
(0.008) (0.008) (0.009) (0.015) (0.015) (0.018)
NONFINANCIAL 0.154 0.256 0.606
(0.111) (0.167) (0.439)
PUBLIC 0.031n 0.033n 0.03 0.002 0.009 0.015
(0.018) (0.019) (0.022) (0.038) (0.041) (0.047)
L AMOUNT 0.053nnn 0.052nnn 0.054nnn 0.037nnn 0.022nnn 0.01
(0.003) (0.003) (0.004) (0.006) (0.007) (0.008)
(0.001) (0.001) (0.002) (0.001) (0.001) (0.001)
CCC 0.828nnn 0.712nnn 0.899nnn 0.801nnn 0.691nnn 1.193nn
(0.264) (0.319) (0.486) (0.286) (0.354) (0.517)
(0.101) (0.118) (0.141) (0.158) (0.185) (0.146)
BB 0.439nnn 0.379nnn 0.572nnn 0.457nnn 0.440nnn 0.896nnn
(0.082) (0.101) (0.110) (0.139) (0.167) (0.102)
BBB 0.175nnn 0.236nnn 0.067 0.212n 0.229 0.143nn
(0.058) (0.078) (0.089) (0.119) (0.143) (0.059)
A 0.173nnn 0.230nnn 0.082 0.232n 0.259n 0.091
(0.057) (0.076) (0.089) (0.120) (0.143) (0.059)
AA-AAA 0.185nnn 0.268nnn 0.096 0.107 0.192 0.162nn
(0.056) (0.077) (0.090) (0.127) (0.149) (0.072)
SENIOR 0.161nnn 0.148nnn 0.059 0.392nnn 0.358nnn 0.287nn
(0.033) (0.035) (0.046) (0.080) (0.096) (0.136)
SINKING FUND 0.032nn 0.033n 0.028 0.022 0.041 0.054
(0.015) (0.018) (0.018) (0.026) (0.033) (0.034)
(0.016) (0.018) (0.021) (0.019) (0.020) (0.022)
RULE144A 0.120nnn 0.125nnn 0.151nnn 0.081nn 0.069n 0.098nn
(0.024) (0.029) (0.036) (0.033) (0.039) (0.047)
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Table 4 (continued)
RELATIONSHIP 0.009 0.014 0.036nn 0.003 0.005 0.011

(0.011) (0.012) (0.017) (0.014) (0.017) (0.023)
UNDERWRITER SHARE 0.221nnn 0.277nnn 0.262nnn 0.227n 0.437nnn 0.018
(0.080) (0.084) (0.100) (0.128) (0.136) (0.174)
SELF MANAGED 0.029 0.031 0.068
(0.041) (0.049) (0.057)
RECESSION 0.032nn 0.017 0.025 0.068nnn 0.017 0.014
(0.013) (0.016) (0.016) (0.022) (0.026) (0.030)
(0.111) (0.108) (0.150) (0.242) (0.279) (0.260
Observations 15,223 11,975 7694 6268 4344 2227
Number of issuers id 2522 1505 398 1803 1059 274
R2 0.27 0.28 0.31 0.27 0.27 0.3
Models estimated with robust standard errors and firm-fixed effects. All years, sample includes the
bonds of all issuers during the sample period (1995–2006); F3Years, sample limited to the bonds
of those issuers that issued at least once during the first 3 years of the sample period; F-L3Years,
sample limited to the bonds of those issuers that issued at least once during the first 3 years and
the last 3 years of the sample period; L TIMETREND, the log of time trend; SENIOR, dummy
RULE144A, dummy variable equal to 1 for bonds issued under Rule 144A; MATURITY, maturity of
the bond; L AMOUNT, log of the issue amount; NONFINANCIAL, dummy variable equal to 1 for
bonds issued by nonfinancials; PUBLIC, dummy variable equal to 1 for bonds issued by public
firms; UNDERWRITERS, number of lead underwriters in the bond syndicate; UNDERWRITER
for bonds with the corresponding credit rating; SELF MANAGED, dummy variable equal to 1
when the underwriter issues debt for itself or for one of its subsidiaries; RELATIONSHIP, dummy
variable equal to 1 when the bond underwriter has also served as a loan arranger to the issuing
firm over a 5-year period before the bond offering; RECESSION, dummy variable equal to 1 if the
bond was issued during the 2001 recession. Included in the regressions but not shown in the table
are (i) a dummy variable to account for the bonds with a missing rating, (ii) dummy variables to
account for the currency of the issue and (iii) dummy variables to account for the sector of
activity of the issuer.
, ,
n nn nnn
shows a larger decline in the gross spreads in the latter market, this result per se
does not imply that the Eurobond market became more competitive than the
US bond market. To facilitate the comparison of gross spreads in both markets
over time, we replace in our model of gross spreads the time trend variable with
a set of time dummies. To that end, we divide the sample period in three
subperiods and use three time dummies to isolate the effect on underwriting
costs in each period. This approach makes it easier to compare the costs of bond
underwriting in the two markets at the beginning of the sample period and at
the end of the sample period.
Again, to reduce concerns with sample selection bias, we consider only firms
that issue in both markets. More specifically, we estimate the gross spread
r 2010 The Authors

specification for three sample variations. The first sample includes firms that
issued in both the US bond market and the Eurobond market at least once over
the sample period (1995–2006). The second sample includes only bonds of firms
that issued in both markets at least once during the first 3 years of the sample
period. The final variation, further limits the sample to bonds of firms that
issued in both markets at least once in the first 3 years of the sample period and
in the last 3 years of the sample period.
Table 7 reports the results of these tests. To better showcase the comparison
between the two markets, the results for each market are reported side by side.
In addition, we present for each pair of models the t-test statistics comparing
Table 5 Gross Spreads in the Eurobond market

1 2 3 4 5 6
L TIME TREND0.292 nnn

0.328 nnn
0.226 nnn
0.370 nnn
0.379 nnn
0.283nnn
(0.022) (0.021) (0.016) (0.036) (0.036) (0.029)
NONFINANICAL 0.202nnn 0.274nnn 0.313nnn
(0.070) (0.068) (0.059)
PUBLIC 0.066n 0.046 0.054nn 0.078n 0.019 0.028
(0.035) (0.031) (0.022) (0.040) (0.038) (0.029)
L AMOUNT 0.029nn 0.028nn 0.027nnn 0.119nnn 0.082nnn 0.098nnn
(0.011) (0.011) (0.007) (0.016) (0.015) (0.015)
MATURITY 0.001 0.001 0.005nnn 0.001 0.001 0.003
(0.001) (0.001) (0.001) (0.002) (0.002) (0.002)
CCC 0.957nnn 0.974nnn 0.931nnn 0.962nnn 0.971n 0.881
(0.407) (0.426) (0.402) (0.560) (0.570) (0.552)
(0.082) (0.088) (0.084) (0.090) (0.094) (0.093)
BB 0.429nnn 0.386nnn 0.403nnn 0.480nnn 0.482nnn 0.403nnn
(0.062) (0.062) (0.063) (0.101) (0.100) (0.104)
BBB 0.072nn 0.107nn 0.053nn 0.221nnn 0.203nnn 0.206nnn
(0.035) (0.030) (0.024) (0.047) (0.046) (0.041)
(0.036) (0.032) (0.024) (0.047) (0.046) (0.040)
AA-AAA 0.2412nnn 0.209nnn 0.071nnn 0.009n 0.117nn 0.014
(0.042) (0.038) (0.025) (0.057) (0.055) (0.045)
SENIOR 0.4091nnn 0.309 0.7531nnn 0.6001nnn
(0.037) (0.035) (0.095) (0.090)
CALLABLE 0.1991nnn 0.0981nnn 0.038 0.071n
(0.023) (0.020) (0.042) (0.036)
RULE144A 0.4071nnn 0.0031nnn 0.225nnn 0.0791nnn
(0.036) (0.026) (0.049) (0.038)
RELATIONSHIP 0.1181nnn 0.029
(0.016) (0.024)
UNDERWRITER 1.6061nnn 0.473
SHARE (0.242) (0.434)
UNDERWRI- 0.0161nnn 0.0671nnn
TERS (0.006) (0.016)
r 2010 The Authors

Table 5 (continued)
1 2 3 4 5 6
SELF MANAGED 0.1101 nnn
(0.042)
(0.094) (0.101) (0.081) (0.114) (0.129) (0.121)
Observations 23,175 23,175 23,175 5106 5106 5106
R2 0.14 0.2 0.38 0.27 0.30 0.43
Models estimated with robust standard errors and clustered by firm to correct for correlation
across observations of a given firm. L TIME TREND, is the log of time trend; CALLABLE, dummy
variable equal to 1 for callable bonds; MATURITY, maturity of the bond; L AMOUNT, log of the
issue amount; NONFINANCIAL, dummy variable equal to 1 for bonds issued by nonfinancials;
PUBLIC, dummy variable equal to 1 for bonds issued by public firms; RULE144A, dummy variable
equal to 1 for bonds issued under Rule 144A; UNDERWRITERS, number of lead underwriters in the
bond syndicate; UNDERWRITER SHARE, market share of the underwriter(s); CCC, B, BB, BBB, A,
AA-AAA, set of dummy variables for bonds with the corresponding credit rating; SELF MANAGED,
dummy variable equal to 1 when the underwriter issues debt for itself or for one of its subsidiaries;
RELATIONSHIP, dummy variable equal to 1 when the bond underwriter has also served as a loan
arranger to the issuing firm over a 5-year period before the bond offering. Included in the
regressions but not shown in the table are (i) a dummy variable to account for the bonds with a
missing rating, (ii) dummy variables to account for the currency of the issue and (iii) dummy
variables to account for the sector of activity of the issuer.
, ,
n nn nnn
the difference between the time dummies in the two markets at the beginning
of the sample period and at the end of the sample period. These tests facilitate a
comparison of the gross spreads between the US bond and the Eurobond market
at these two points in time and consequently ascertain which market possibly
gained a competitive advantage as result of lower gross spreads identified in the
previous subsections.
Regardless of whether we consider bonds issued by all firms or focus on those
offered by nonfinancial firms and irrespective of the sample we use to estimate
our models of gross spreads, the results reported in Table 7 reveal two important
findings.21 First, at the beginning of the sample period the gross spreads were
significantly lower in the US bond market than in the Eurobond market. The
time dummy that identifies the gross spreads in the first 3 years of the sample
period (1995–1997) is systematically lower in the US model of gross spreads
than in the Eurobond model and their difference is statistically significant.
Second, by the end of the sample period the gross spreads in the two markets
had converged. A comparison of the time dummies that capture these costs in
21 We have also repeated these tests limiting the sample to nonfinancial issuers. Consistent with
our previous similar tests limiting the sample to nonfinancial issuers, the results remained
unchanged. For this reason, we do not report the results of latter tests but they are available from
the authors upon request.
r 2010 The Authors

the two markets in the last 3 years of the sample period (2004–2006) reveals that
their difference is not statistically significant.
In sum, our results show that in the mid-1990s the gross spreads were
significantly higher in the Eurobond market than in the US bond market,
suggesting that it was more expensive to issue in the Eurobond market. In the
decade that followed, the gross spreads declined in the US bond market,
responding to greater competition from the entry of commercial banks in the
investment banking business. However, during the same time period, financial
deregulation and the advent of the euro have enabled the Eurobond market to
catch up and erase the competitive advantage of the US bond market. The gross
spreads differential between the two markets has vanished by the mid-2000s.
These results are robust and are not likely driven by sample selection. These
findings, therefore, suggest that the Eurobond market caught up with the US bond
market and by 2006 the underwriting costs were similar in the two markets.
V. HAS THE US BOND MARKET LOST SOME OF ITS

COMPETITIVE EDGE?
Our previous conclusion that there was an improvement in the competitiveness

of the Eurobond market relative to the US bond market over the last decade
Table 6 Gross Spreads in the Eurobond market: Further results

L TIME TREND 0.199nnn 0.192nnn 0.226nnn 0.310nnn 0.300nnn 0.407nnn

(0.009) (0.009) (0.011) (0.025) (0.026) (0.034)
NONFINANCIAL 0.333nn 0.351 0.109
(0.166) (0.368) (0.115)
PUBLIC 0.072nnn 0.100nnn 0.094nnn 0.001 0.022 0.037
(0.020) (0.022) (0.028) (0.051) (0.060) (0.080)
L AMOUNT 0.001 0.021nnn 0.009 0.051nnn 0.083nnn 0.073nnn
(0.004) (0.006) (0.007) (0.013) (0.016) (0.022)
MATURITY 0.010nnn 0.012nnn 0.016nnn 0.005 0.001 0.001
(0.001) (0.001) (0.002) (0.002) (0.003) (0.003)
CCC 0.587 1.09
(0.446) (0.697)
B 0.208nnn 0.113 0.124 0.173 0.043 0.169
(0.065) (0.078) (0.081) (0.138) (0.177) (0.187)
BB 0.282nnn 0.101n 0.046 0.175 0.265nn 0.397nn
(0.056) (0.059) (0.069) (0.104) (0.122) (0.157)
BBB 0.005 0.065nn 0.064 0.050 0.006 0.006
(0.023) (0.031) (0.042) (0.056) (0.079) (0.099)
A 0.066nnn 0.002nnn 0.097nnn 0.055 0.089n 0.07
(0.016) (0.019) (0.025) (0.046) (0.053) (0.067)
r 2010 The Authors

Table 6 (continued)
AA-AAA 0.029nn 0.009 0.007 0.066 0.109nn 0.037

(0.015) (0.017) (0.022) (0.048) (0.054) (0.063)
SENIOR 0.278nnn 0.311nnn 0.288nnn 0.667nnn 0.814nnn 0.691nnn
(0.024) (0.033) (0.040) (0.130) (0.171) (0.197)
CALLABLE 0.093nnn 0.101nnn 0.172nnn 0.028 0.038 0.138n
(0.013) (0.014) (0.022) (0.035) (0.040) (0.062)
RULE144A 0.111nnn 0.113nnn 0.137nnn 0.029 0.018 0.008
(0.015) (0.017) (0.022) (0.035) (0.040) (0.062)
RELATIONSHIP 0.069nnn 0.087nnn 0.103nnn 0.064nnn 0.104nnn 0.169nnn
(0.009) (0.011) (0.016) (0.021) (0.027) (0.039)
UNDERWRITER SHARE 1.107nnn 1.605nnn 1.656nnn 0.224 0.814 1.457nn
(0.164) (0.209) (0.240) (0.421) (0.574) (0.668)
UNDERWRITERS 0.010nn 0.013nn 0.015nn 0.006 0.021 0.006
(0.004) (0.007) (0.007) (0.017) (0.026) (0.028)
SELF MANAGED 0.155nnn 0.105nnn 0.194
(0.032) (0.033) (0.039)
(0.167) (0.364) (0.127) (0.482) (0.379) (0.235)
Observations 23,175 15,908 8801 5106 3052 1153
Number of issuers 3587 1693 333 1665 781 126
R2 0.24 0.26 0.29 0.26 0.30 0.39
bonds of all issuers during the sample period (1995–2006); F3Years, sample limited to the bonds
of those issuers that issued at least once during the first 3 years of the sample period; F-L3Years,
sample limited to the bonds of those issuers that issued at least once during the first 3 years and
the last 3 years of the sample period; L TIME TREND, is the log of time trend; CALLABLE, dummy
variable equal to 1 for callable bonds; MATURITY, maturity of the bond; L AMOUNT, log of the
issue amount; NONFINANCIAL, dummy variable equal to 1 for bonds issued by nonfinancials;
PUBLIC, dummy variable equal to 1 for bonds issued by public firms; RULE144A, dummy variable
equal to 1 for bonds issued under Rule 144A; UNDERWRITERS, number of lead underwriters in the
bond syndicate; UNDERWRITER SHARE, market share of the underwriter(s); CCC, B, BB, BBB, A,
AA-AAA, set of dummy variables for bonds with the corresponding credit rating; SELF MANAGED,
dummy variable equal to 1 when the underwriter issues debt for itself or for one of its subsidiaries;
RELATIONSHIP, dummy variable equal to 1 when the bond underwriter has also served as a loan
arranger to the issuing firm over a 5-year period before the bond offering. Included in the
, ,
n nn nnn
implicitly assumes that the decline in the relative gross spreads in the Eurobond
market led to a decline in the relative cost of bond underwriting in that market.
In other words, we implicitly ruled out the hypothesis that the relative decline
in the gross spreads in the Eurobond market was not simply the result of a
change in the pricing practice in one of these two competing markets with no
affect on the underwriting costs.
r 2010 The Authors

Table 7 Gross spreads in the US bond and Eurobond markets for firms that issue in
both markets
Variables All years F3Years F-L3Years
US EU US EU US EU
FIRST 3 YEARS 0.013 0.275nnn 0.007 0.274nnn 0.027nnn 0.302nnn

(0.014) (0.018) (0.014) (0.018) (0.016) (0.022)
LAST 3 YEARS 0.049nnn 0.060nnn 0.050nnn 0.076nn 0.060nn 0.065nn
(0.014) (0.023) (0.016) (0.030) (0.016) (0.030)
NONFINANCIAL 0.104n 0.679nn 0.128nn 0.661 0.191 0.209nnn
(0.057) (0.301) (0.058) (0.436) (0.341) (0.043)
PUBLIC 0.038n 0.082nnn 0.032 0.106nnn 0.013 0.119nnn
(0.022) (0.026) (0.022) (0.028) (0.026) (0.035)
L AMOUNT 0.053nnn 0.007 0.053nnn 0.016n 0.053nnn 0.004
(0.004) (0.007) (0.004) (0.008) (0.004) (0.009)
(0.002) (0.002) (0.003) (0.002) (0.003) (0.002)
CCC 0.34 0.195 0.378
(0.415) (0.483) (0.773)
B 1.002nnn 0.281nnn 0.980nnn 0.300nn 1.046nnn 0.205n
(0.174) (0.106) (0.195) (0.124) (0.200) (0.121)
BB 0.500nnn 0.052 0.489nnn 0.045 0.563nnn 0.032
(0.131) (0.074) (0.166) (0.080) (0.163) (0.087)
BBB 0.069 0.171nnn 0.07 0.201nnn 0.158 0.245nnn
(0.070) (0.039) (0.101) (0.045) (0.108) (0.060)
A 0.052 0.121nnn 0.046 0.152 0.142 0.154nnn
(0.066) (0.026) (0.097) (0.029) (0.107) (0.034)
AA-AAA 0.031 0.009 0.045 0.015 0.075 0.019
(0.065) (0.022) (0.097) (0.024) (0.109) (0.029)
(0.026) (0.022) (0.028) (0.023) (0.033) (0.030)
SENIOR 0.005 0.225nnn 0.014 0.242nnn 0.062 0.233nnn
(0.040) (0.040) (0.044) (0.046) (0.054) (0.055)
SINKING FUND 0.077nnn 0.069nnn 0.060nn
(0.021) (0.024) (0.024)
RULE144A 0.094nnn 0.192nnn 0.124nnn 0.184nnn 0.103nn 0.202nnn
(0.033) (0.022) (0.043) (0.024) (0.053) (0.029)
RELATIONSHIP 0.054nnn 0.056nnn 0.066nnn 0.081nnn 0.084nnn 0.095nnn
(0.018) (0.015) (0.022) (0.017) (0.030) (0.022)
UNDERWRITER SHARE 0.191nn 1.124nnn 0.253nn 1.444nnn 0.260nn 1.467nnn
(0.095) (0.245) (0.103) (0.287) (0.116) (0.320)
UNDERWRITERS 0.055nnn 0.005 0.072nnn 0.010 0.073nnn 0.011
(0.009) (0.005) (0.010) (0.008) (0.010) (0.009)
SELF MANAGED 0.040 0.132nnn 0.045 0.076n 0.087 0.179nnn
(0.037) (0.042) (0.045) (0.044) (0.054) (0.051)
RECESSION 0.044nnn 0.029 0.022
(0.016) (0.018) (0.019)
CONSTANT 0.107 1.884nnn 0.325n 1.886nnn 0.041 1.432nnn
(0.211) (0.294) (0.198) (0.425) (0.358) (0.093)
Observations 8372 9011 7022 7213 5425 5114
R2 0.35 0.28 0.35 0.29 0.38 0.30
r 2010 The Authors

Table 7 (continued)
US EU US EU US EU
EU first years 0.275 0.274 0.302

US first years 0.013 0.007 0.027
t-Tests 12.50nnn 12.28nnn 12.20nnn
EU last years 0.060 0.076 0.065
US last years 0.049 0.050 0.060
t-Tests 0.40 0.78 0.15
Models estimated with robust standard errors and firm-fixed effects. All years, sample includes
the bonds of all issuers (that issued in both markets) during the sample period (1995–2006);
F3Years, sample limited to the bonds of those issuers that issued at least once during the first 3
years of the sample period in both markets; F-L3Years, sample limited to the bonds of those
issuers that issued at least once during the first 3 years and the last 3 years of the sample period
in both markets; FIRST 3 YEARS, dummy variable equal to 1 for bonds issued during the first
years of the sample period; LAST 3 YEARS, dummy variable equal to 1 for bonds issued during
the last years of the sample period; L TIME TREND, is the log of time trend; SENIOR, dummy
RULE144A, dummy variable equal to 1 for bonds issued under Rule 144A; MATURITY, maturity
of the bond; L AMOUNT, log of the issue amount; NONFINANCIAL, dummy variable equal to 1
for bonds issued by nonfinancials; PUBLIC, dummy variable equal to 1 for bonds issued by
public firms; UNDERWRITERS, number of lead underwriters in the bond syndicate; UNDER-
WRITER SHARE, market share of the underwriter(s); CCC, B, BB, BBB, A, AA-AAA, set of dummy
variables for bonds with the corresponding credit rating; SELF MANAGED, dummy variable
equal to 1 when the underwriter issues debt for itself or for one of its subsidiaries;
RELATIONSHIP, dummy variable equal to 1 when the bond underwriter has also served as a
loan arranger to the issuing firm over a 5-year period before the bond offering; RECESSION,
dummy variable equal to 1 if the bond was issued during the 2001 recession. Included in the
, ,
n nn nnn
As noted previously, we are unaware of any change in the pricing practices in

these markets that could explain our findings. According to Smith and Walter
(2003), most of the issues in the Eurobond market adopted the American fixed-
price practice since 1989, roughly 6 years before the beginning of our sample
period. To further reduce concerns with this alternative explanation for our
findings, we attempt to identify some effects of the relative decline in the gross
spreads in the Eurobond market vis-á-vis the US bond market. If the decline of
the relative gross spreads in the Eurobond market did indeed contribute to a
decline in the relative underwriting costs in this market, assuming these costs
play a role on firms’ market choice, then over the 10-year period of study, we
should observe a migration of bond issuance from the US bond market into the
Eurobond market.
In this section, we test this hypothesis by investigating the market choice of
US firms to issue their bonds. To that end, we first investigate if the gross spreads
r 2010 The Authors

that US firms paid at home and in the Eurobond market follow the same
patterns to those unveiled earlier based on the entire sample of firms (US and
non-US) issuing in the US bond and Eurobond markets. After this comparison,
we investigate if the gross spreads in these markets affected the market choice of
US firms and if so whether they contributed to the migration of US firms to the
Eurobond market.
A. Gross spreads paid by US firms issuing in both markets

To ascertain if US firms benefited from the decline in the gross spread in the
Eurobond market relative to the US bond market, we identified in our sample
the country of origin for each firm and isolated all US issuers. Following the
same approach adopted earlier to account for potential sample selection, we
created three subsamples of firms. The first sample considers only US firms that
issued at least once in the US bond market and the Eurobond market over the
sample period. The second sample, limits to US firms that issued in both
markets at the beginning of the sample period. The last sample imposes the
additional condition that the firm must have issued in both markets not only at
the beginning but also at the end of the sample period. As before, we define the
beginning period by the first 3 years of the sample range and the end by the last
3 years.
We estimated gross spread specifications for these three samples of bonds
issued by US firms. The results of this analysis are reported in Table 8.22
Irrespective of which sample variation we consider, our findings are very similar
to those we unveiled previously examining the entire set of issuers in these
markets. The time dummy variable, which captures the gross spreads at the
beginning of the sample period, is always significantly higher for Eurobond
issues. In contrast, the dummy variables that test for differences in gross spreads
across the two markets at the end of the sample period are no longer statistically
different from each other.
These findings confirm that while the gross spreads were lower in the US
bond market than in the Eurobond market in the mid of the 1990s, 10 years
later the difference between these spreads in the two markets was all but gone.
Has this convergence in the comparative underwriting costs in these two large
markets given an impetus to US firms to issue in the Eurobond market as
opposed to the US bond market? We investigate this possibility in the next
subsection.
22 We have also repeated this analysis focusing exclusively on nonfinancial issuers. Overall, the
findings remained unchanged, indicating no significant differences between financial and
nonfinancial firms. For the sake of brevity, these results are not reported in the paper but are
available from the authors upon request.
r 2010 The Authors

Table 8 Gross spreads in the US bond and Eurobond markets for US firms that
issue in both markets
US EU US EU US EU
FIRST 3 YEARS 0.011 0.275nnn 0.005 0.278nnn 0.021 0.293nnn

(0.015) (0.032) (0.015) (0.033) (0.016) (0.036)
LAST 3 YEARS 0.042nnn 0.080nn 0.046nnn 0.079n 0.055nnn 0.074n
(0.015) (0.037) (0.016) (0.044) (0.017) (0.044)
NONFINANICAL 0.208n 0.524 0.198 0.921nn 0 0.277nnn
(0.122) (0.504) (0.397) (0.404) 0.000 (0.097)
PUBLIC 0.032 0.075 0.026 0.145nnn 0.02 0.145nn
(0.022) (0.053) (0.021) (0.056) (0.025) (0.062)
L AMOUNT 0.052nnn 0.005 0.051nnn 0.005 0.050nnn 0.016
(0.004) (0.014) (0.004) (0.015) (0.005) (0.017)
(0.002) (0.003) (0.003) (0.004) (0.003) (0.004)
CCC 0.322 0.291 0.322
(0.4850) (0.4660) (0.7670)
B 1.173nnn 0.486 1.120nnn 0.422 1.038nnn
(0.184) (0.403) (0.197) (0.359) (0.202)
BB 0.792nnn 0.729nnn 0.756nnn 0.710nnn 0.552nnn
(0.125) (0.274) (0.151) (0.268) (0.169)
BBB 0.201nn 0.300nnn 0.198n 0.286nnn 0.148 0.505nnn
(0.085) (0.064) (0.108) (0.068) (0.118) (0.098)
A 0.191nn 0.178nnn 0.177n 0.211nnn 0.144 0.253nnn
(0.084) (0.057) (0.108) (0.062) (0.119) (0.067)
AA-AAA 0.077 0.03 0.043 0.022 0.034 0.014
(0.085) (0.057) (0.108) (0.062) (0.119) (0.067)
(0.028) (0.042) (0.030) (0.043) (0.035) (0.057)
SENIOR 0.008 0.244nnn 0.006 0.287nnn 0.081 0.363nnn
(0.041) (0.084) (0.044) (0.088) (0.054) (0.093)
SINKING FUND 0.066nnn 0.050n 0.036
(0.022) (0.026) (0.026)
RULE144A 0.063nnn 0.190nnn 0.114nn 0.156nnn 0.120nn 0.214nnn
(0.037) (0.038) (0.045) (0.041) (0.054) (0.048)
RELATIONSHIP 0.063nnn 0.013 0.081nnn 0.011 0.101nnn 0.011
(0.021) (0.028) (0.025) (0.032) (0.032) (0.041)
UNDERWRITER SHARE 0.137 1.279nnn 0.182n 1.839nnn 0.212n 1.701nnn
(0.100) (0.422) (0.108) (0.402) (0.122) (0.534)
UNDERWRITERS 0.060nnn 0.015 0.075nnn 0.010 0.076nnn 0.026
(0.010) (0.013) (0.011) (0.022) (0.011) (0.023)
SELF MANAGED 0.038 0.234nnn 0.043 0.230nnn 0.080 0.266nnn
(0.037) (0.065) (0.044) (0.073) (0.054) (0.076)
RECESSION 0.062nnn 0.052nnn 0.046nn
(0.017) (0.019) (0.019)
CONSTANT 0.192 0.833n 0.174 2.293nnn 0.048 1.297nnn
(0.331) (0.500) (0.410) (0.396) (0.391) (0.162)
Observations 7230 3157 6156 2460 4901 1988
r 2010 The Authors

Table 8 (continued)
US EU US EU US EU

R2 0.36 0.25 0.36 0.26 0.39 0.29
EU first years 0.275 0.278 0.293
US first years 0.011 0.005 0.021
t-Tests 9.22nnn 8.96nnn 9.23nnn
EU last years 0.080 0.079 0.074
US last years 0.042 0.046 0.055
t-Tests 1.14 0.88 0.49
bonds of all US issuers (that issued in both markets) during the sample period (1995–2006); F3Years,
sample limited to the bonds of those US issuers that issued at least once during the first 3 years of
the sample period in both markets; F-L3Years, sample limited to the bonds of those US issuers that
issued at least once during the first 3 years and the last 3 years of the sample period in both markets;
FIRST 3 YEARS, dummy variable equal to 1 for bonds issued during the first years of the
sample period; LAST 3 YEARS, dummy variable equal to 1 for bonds issued during the last years
of the sample period; L TIME TREND, is the log of time trend; SENIOR, dummy variable equal to
1 for senior subordinated bonds; SINK FUND, dummy variable equal to 1 for bonds that
have a sinking fund; CALLABLE, dummy variable equal to 1 for callable bonds; RULE144A,
dummy variable equal to 1 for bonds issued under Rule 144A; MATURITY, maturity of the bond; L
AMOUNT, log of the issue amount; NONFINANCIAL, dummy variable equal to 1 for bonds
issued by nonfinancials; PUBLIC, dummy variable equal to 1 for bonds issued by public firms;
UNDERWRITERS, number of lead underwriters in the bond syndicate; UNDERWRITER
for bonds with the corresponding credit rating; SELF MANAGED, dummy variable equal to 1 when
the underwriter issues debt for itself or for one of its subsidiaries; RELATIONSHIP, dummy
variable equal to 1 when the bond underwriter has also served as a loan arranger to the issuing firm
over a 5-year period before the bond offering; RECESSION, dummy variable equal to 1 if the bond
was issued during the 2001 recession. Included in the regressions but not shown in the table are (i)
a dummy variable to account for the bonds with a missing rating, (ii) dummy variables to account
for the currency of the issue and (iii) dummy variables to account for the sector of activity
of the issuer.
, ,
n nn nnn
B. US firms’ choice of underwriting market

Looking at aggregate volume trends of issuance, there is evidence that US
corporate issuers are increasingly seeking to borrow in the Eurobond market.23
The recent shift of US bond issuance abroad is particularly evident among
specialized financial issuers such as collateralized debt obligations. The self-
regulated character of the Eurobond market is particularly suited for asset-
backed securities, many of which are sponsored by financial firms such as
investment banks and hedge funds. With the fast growth of asset securitization
23 European firms also appear to be moving back to their home market. The share of European
issuers borrowing in the US bond market dropped from more than 20% in the late 1990s to
approximately 9% in 2006.
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over the last two decades, asset-backed financial issuers became an important
segment of the bond market. Importantly, though, even if we exclude all asset-
based issues, aggregate trends continue to reveal a push by some US firms to
issue overseas. For instance, the share of US firms that issued domestically
declined from 92% in 1995 to 82% in 2006.
What are the reasons driving this gradual but significant shift in US bond
issuers to the Eurobond market? Several studies have documented the
increasing tendencies of US or foreign companies to issue outside their
domestic markets, attributing these tendencies to such factors as yield
differentials and ‘opportunistic’ reasons arising from deviations in interest rate
parity (Kim and Stulz 1988; Henderson et al. 2006; McBrady and Schill 2007).
In this section, we investigate if the decline in the relative gross spreads in
the Eurobond market, and the likely decline in the underwriting costs in this
market vis-á-vis the US bond market, could also explain that migration of US
firms to the Eurobond market. The analysis employs the two-stage methodol-
ogy outlined in Section III.A.ii, examining the decision of US firms to issue
domestically or in the Eurobond market. The first stage of our methodology
derives an instrument for the notional (shadow) gross spread faced by the issuer
in the two competing markets. The shadow gross spread is the key explanatory
variable in the second-stage logistic regression that estimates the determinants
of the probability of issuing in the US bond or Eurobond markets. Essentially,
the first-stage estimation is very similar to the gross spread regression analysis
discussed in greater detail in Section IV. In the interest of space, we report in
Table 9 only the results of the second-stage logistic regression.
The first column in Table 9 summarizes the baseline logistic regression model
examining the choice of all US firms to issue domestically or in the Eurobond
market area. The different magnitudes and signs of the coefficients estimates of
the credit dummy variables confirm that creditworthiness is a key determinant
of the decision to issue in these competing markets. In particular, the coefficient
on the dummy indicator that represents firms with credit ratings in the
neighborhood of AAA is negative and statistically significant, indicating that
these high-credit quality firms exhibit a greater likelihood of borrowing in the
Eurobond area. In contrast, the estimates for lower levels of credit quality are
positive. These results demonstrate that access to the Eurobond market is pretty
much confined to highly rated US companies.
The typical nonfinancial borrower in the Eurobond market during this
sample period attained an A S&P rating compared with a BBB rating in the US
bond market. This difference in credit quality is evident in the positive and
significant parameter estimate of the financial indicator variable demonstrating
that US nonfinancial companies face a greater cost-benefit threshold and are
more likely to issue in their home market. The second and third columns in the
table analyze the pattern of financing for financial and nonfinancial firms. This
breakdown reveals that large and highly rated US financial firms are the
predominant issuers in the Eurobond market. Choudhry (2006) notes that
borrowers in the Eurobond market must have a name of high recognition
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otherwise they need a sufficient quality credit rating to compensate for the lack
of visibility. The positive and statistically significant coefficient on the callable
dummy variable indicates again that bond issues with a call feature (typically,
issued by more speculative grade companies) are less likely to borrow from the
Eurobond market. Not surprising, companies seeking to issue 144A bonds are
more likely to do so in the US bond market where the group of qualified
investors are most likely to reside.
The key finding of the logit regression analysis is that gross spread ratio is
negatively correlated with the probability that a US firm would issue at home.
As noted before, a higher value of the gross spread ratio (between 0.5 and 1)
indicates that it is cheaper for the firm to issue in the Eurobond market. The
magnitude of the negative coefficient on gross spread ratio is similar across
financial and nonfinancial issuers (shown in the second and third column of
Table 9). This result shows that corporate debt issuers are sensitive to the
underlying gross spread structure in the two markets and seek to issue in the
market that provides the best gross spread. This finding is important because it
Table 9 Issuers’ choice between the US bond market and the Eurobond market
Variables Issuers
ALL FINANCE NONFIN ALL NONFIN ALL

F-L3years
GROSS SPREAD 3.093nnn 4.005nnn 2.943nnn 3.743nnn 3.248nnn 5.384nnn

RATIO (181.95) (143.24) (84.85) (127.16) (79.60) (16.08)
FOREIGN SALES 0.037nnn 0.040nnn 0.033nnn
RATIO (899.46) (879.39) (90.58)
RECESSION 0.114 0.215nn 0.238 0.354nn 0.175 0.106
(2.12) (5.84) (1.87) (5.28) (0.79) (0.13)
L AMOUNT 0.324nnn 0.402nnn 0.122nnn 0.062nnn 0.013 0.295nnn
(665.02) (599.00) (39.41) (8.33) (0.32) (21.06)
(54.18) (90.88) (8.88) (36.29) (20.90) (20.22)
MATURITY 0.005nn 0.014nnn 0.094nnn 0.105nnn 0.113nnn 0.078nnn
(4.84) (15.06) (113.49) (96.92) (83.08) (10.79)
RULE144A 0.335nnn 0.266nnn 0.863nnn 0.254nnn 0.768nnn 2.003nnn
(62.65) (21.62) (119.95) (9.76) (97.11) (44.12)
USDOLLAR 0.274nnn 0.209nnn 2.013nnn 1.901nnn 2.228nnn 1.441nnn
(50.78) (18.89) (726.12) (568.08) (695.51) (23.52)
CCC 1.309 15.795nnn 0.231 0.321nnn
(1.52) (1202.7) (0.05) (0.14)
B 0.485nnn 0.516nnn 0.322nn 0.197 0.356nn 17.043nnn
(11.00) (28.32) (4.32) (1.34) (4.73) (597.40)
BB 0.368nnn 1.081nnn 0.020 0.312nnn 0.064 17.048nnn
(20.69) (30.50) (0.03) (8.97) (0.34) (1116.2)
BBB 0.735nnn 1.179nnn 0.430nnn 1.079nnn 0.923nnn 3.999nnn
(41.03) (15.09) (12.11) (69.92) (57.40) (12.45)
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Table 9 (continued)
Variables Issuers
ALL FINANCE NONFIN ALL NONFIN ALL

F-L3years

(99.81) (48.23) (11.64) (29.81) (29.76) (3.28)
AA 0.620nnn 0.450nnn 0.153 0.553nnn 0.887nnn 0.249
(63.68) (17.94) (1.77) (23.67) (49.51) (0.41)
AAA 0.645nnn 0.966nnn 0.514nnn 0.576nnn 0.624nnn 1.053nn
(49.88) (53.54) (13.20) (12.35) (13.94) (3.98)
NONFINANCIAL 1.024nnn 0.125 0.409nnn 0.036
(805.30) (2.20) (10.15) (0.06)
CONSTANT 4.192nnn 5.049nnn 4.166nnn 0.797nnn 0.484 3.021nnn
(555.33) (386.00) (304.47) (8.93) (2.26) (9.64)
US issuers 31,243 20,336 10,907 8748 6083 2665
Euro issuers 4458 3589 869 1078 835 243
Pseudo-R2 0.06 0.071 0.065 0.123 0.157 0.155
Likelihood ratio 2215 1758.9 790.8 1292.9 1181.6 488.5
bonds of all US issuers (that issued in both markets) during the sample period (1995–2006); F-
L3Years, sample limited to the bonds of those US borrowers that issued at least once during the
first 3 years and the last 3 years of the sample period in both markets; Included in the regressions
but not shown in the table are year dummy variables; GROSS SPREAD RATIO, the ratio of
estimated gross spread in the US bond market divided by the sum of the estimated gross spreads
in the US bond and Eurobond markets (see Section III.A.ii for a formal definition); FOREIGN
SALES RATIO, the ratio firm revenues derived from overseas operations divided by total revenues;
CALLABLE, dummy variable equal to 1 for callable bonds; RULE144A, dummy variable equal to 1
for bonds issued under Rule 144A; MATURITY, maturity of the bond; L AMOUNT, log of the issue
amount; CCC, B, BB, BBB, A, AA-AAA, set of dummy variables for bonds with the corresponding
credit rating; RECESSION, dummy variable equal to 1 if the bond was issued during the 2001
recession; EURO, dummy variable equal to 1 if the bond denominated in euros; DOLLAR, dummy
variable equal to 1 if the bond denominated in dollars.
, ,
n nn nnn
essentially confirms that the gross spreads in these markets are indeed
correlated with the actual costs of underwriting.
Internationally active companies consider the Eurobond market as a good
source to hedge some of their foreign currency exposures and enhance their
international profile. The last three columns in Table 9 examine the importance
of the currency exposure of US corporations on the decision to issue in the
Eurobond market by controlling for the ratio of company sales obtained abroad.
Because the Bureau van Dijk provides the breakdown of company revenues by
country of origin predominantly to nonfinancial corporations, the results in the
last three columns can also be viewed as a robustness test to the earlier findings
when we limit our sample to bonds of nonfinancials. Overall, the positive and
strongly significant coefficient of the foreign sales ratio demonstrates that
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companies with large currency exposure and strong international presence are
more likely to issue Eurobonds. Importantly, even when we control for firms’
foreign exposure, we continue to find that US firms are sensitive to the relative
gross spreads in the two markets under consideration, further supporting our
interpretation that these spreads are correlated with the bond underwriting cost
in each market.
The last column in the table estimates the logit model focusing on the
sample of firms that were actively issuing in the first and last 3 years of the
sample period, eliminating many of the sample selection biases that may stem
from the smaller transitory US issuers that never seriously consider offering in
the Eurobond area. Our results indeed show that this group of stable issuers is
more responsive to gross spread disparities in the two markets. Presumably, US
firms that have the infrastructure in place to issue in both markets are more
eager to game the underwriting cost differential between the two markets.
We have also investigated how US firms have reacted to the convergence in
the gross spreads in the two markets over the last decade. To that end, we added
to our logit regression the interaction of the gross spread ratio variable with the
time dummy variables for the periods 1995–1997 and 2004–2006. The results of
this test, which are available from the authors upon request, confirm that US
firms were much more responsive to the narrower gross spread differential in
the period 2004–2006 and were more eager to borrow in the Eurobond market
more recently.24
In sum, our previous findings suggested that the convergence in the gross
spreads in the Eurobond market and the US bond market over the last decade
resulted in a convergence in the underwriting costs between these markets.
Since in the mid-1990s gross spreads were substantially higher in the Eurobond
market than in the US bond market, that convergence led to an improvement
in the relative competitiveness of the Eurobond market. The evidence we just
presented showing that the relative gross spreads in these markets did play a
role on US firms’ decision to migrate to the Eurobond market adds further
support to our earlier finding that the Eurobond market caught up with the US
bond market and became a viable alternative for firms looking for a market to
issue their bonds.
VI. FINAL REMARKS
We have shown that while in the mid-1990s the gross spread in the US bond
market was significantly lower than in the Eurobond market, this difference has
all but disappeared in the decade that followed. Gross spreads in the US bond
market declined during this period, but they came down at an even faster rate in
24 We also find that smaller and less frequent issuers that did not keep a constant presence in the
market were particularly sensitive to cheaper financial costs in the Eurobond market and were
more likely to issue abroad in 2004–2006.
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the Eurobond market. This conversion in the gross spreads indicates an

improvement in the competitive stance of the Eurobond market. For once, our
findings do not appear to be the result of sample selection because we derive
them on samples of issuers both common to the two markets and constant over
the sample period. Further, we find no evidence that ex ante yield spreads in the
US bond and the Eurobond markets increased over the sample period.25 This
finding is important because it dismisses concerns that underwriters might have
sought to offset the decline in fees by raising yields (thereby lowering the prices
paid to the issuer) at the time of the firm-commitment offering. This would
increase the underwriter’s probability of selling the issue, though at cost to the
issuer because it lowers the proceeds.26
Lastly, our results showing that the decline in the relative gross spread in the
Eurobond market contributed to the bond issuance exodus from the US bond
market also support our conclusion that the convergence in the relative gross
spreads improved the competitive position of the Eurobond bond market vis-á-
vis the US bond market.
Our findings lend support to the concerns with the competitiveness of the US
financial markets. Much of the recent debate on the competitive strength of the
US financial sector has focused on equity markets – particularly, the ability of
the NYSE and NASDAQ to remain the dominant stock markets. However, our
analysis reveals a deterioration in the relative competitiveness of the US bond
market. Over the last decade, underwriting costs declined faster in the
Eurobond market than in the US bond market. As a result, the US bond market
has lost a significant share of the underwriting business to the Eurobond
market, and it stopped being the undisputed home for US debt issuers. The
reduction in the underwriting costs in the Eurobond market we identified could
also have effects at a different level. By making bond financing relatively more
attractive to European firms, this could have important implications to the
bank-based systems that still dominate in Europe.
Stavros Peristiani
Federal Reserve Bank of New York
33 Liberty St.
New York, NY 10045
steve.peristiani@ny.frb.org
25 In the case of bonds issued in the US bond market, we compute their ex ante yield spreads over
the Treasury with the same maturity of the bond. In the case of bonds issued in the Eurobond
market, because our sample predates the euro, we use two alternative approaches to compute ex
ante credit spreads. In the first approach computes the spreads over the US Treasury with the
same maturity of the bond. In the second approach, we use a combination of the euro and
German securities to compute the ex ante credit spreads.
26 See Gande et al. (1999) investigation of the impact that commercial banks’ entry in the
investment banking business in United States had on bond underwriting costs for an extensive
discussion on these concerns.
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International Review of Finance, 10:2, 2010: pp.

Has the US Bond Market Lost its

contribute to this debate by investigating the relative competitiveness of the US

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man’ rules, that reinforce the well-documented tendency of investor portfolios

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II. THE US AND EUROBOND PRIMARY CORPORATE MARKETS

To better understand the evolution of the underwriting costs in the US bond

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impetus to continue to prosper. Before the establishment of the European EMU,

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III. METHODOLOGY, DATA AND SAMPLE CHARACTERIZATION

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i. The cost of bond underwriting in the US bond and Eurobond markets

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ii. Bond underwriting costs and firms’ market choices

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US bond Eurobond Difference US bond Eurobond Difference US bond Eurobond Difference

Observations 15,223 23,175 8375 9011 7230 3157

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IV. UNDERWRITING COSTS IN THE US BOND AND

A. Gross spreads in the US bond market

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Table 3 Gross Spreads in the US bond market

L TIME TREND 0.044nn 0.051nnn 0.055nnn 0.109 0.106nnn 0.111nnn

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BBB 0.745 nnn

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B. Gross spreads in the Eurobond market

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C. Which market became more competitive?

Table 4 Gross spreads in the US bond market: Further results

All years F3Years F-L3Years All years F3Years F-L3Years

L TIME TREND 0.014 n

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All years F3Years F-L3Years All years F3Years F-L3Years

RELATIONSHIP 0.009 0.014 0.036nn 0.003 0.005 0.011

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Table 5 Gross Spreads in the Eurobond market

L TIME TREND0.292 nnn

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SELF MANAGED 0.1101 nnn

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V. HAS THE US BOND MARKET LOST SOME OF ITS

Our previous conclusion that there was an improvement in the competitiveness

Table 6 Gross Spreads in the Eurobond market: Further results

All years F3Years F-L3Years All years F3Years F-L3Years

L TIME TREND 0.199nnn 0.192nnn 0.226nnn 0.310nnn 0.300nnn 0.407nnn

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All years F3Years F-L3Years All years F3Years F-L3Years

AA-AAA 0.029nn 0.009 0.007 0.066 0.109nn 0.037

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FIRST 3 YEARS 0.013 0.275nnn 0.007 0.274nnn 0.027nnn 0.302nnn

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EU first years 0.275 0.274 0.302

As noted previously, we are unaware of any change in the pricing practices in

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