TY - JOUR AU - Drucker,Steven AU - Puri,Manju TI - The Tying of Lending and Equity Underwriting JF - National Bureau of Economic Research Working Paper Series VL - No. 10491 PY - 2004 Y2 - May 2004 UR - http://www.nber.org/papers/w10491 L1 - http://www.nber.org/papers/w10491.pdf N1 - Author contact info: Steven Drucker Columbia Business School 3022 Broadway Uris Hall, Room 414 New York, NY 10027 Tel: 212/854-4151 E-Mail: sd2281@columbia.edu Manju Puri Fuqua School of Business Duke University 1 Towerview Drive, Box 90120 Durham, NC 27708-0120 Tel: 919/660-7657 Fax: 919/681-6246 E-Mail: mpuri@duke.edu AB - This article examines the practice of tying,' which occurs when an underwriter lends to an issuer around the time of a public securities offering. We examine whether there are efficiencies from tying lending and underwriting which lead to benefits for issuers and underwriters. We find evidence consistent with tying occurring for issues when there are informational economies of scope from combining lending and underwriting. Firms benefit from tying through lower financing costs, as tied issuers receive lower underwriter fees on seasoned equity offerings and discounted loan yield spreads. These financing costs are significantly reduced for non-investment grade issuers, where informational economies of scope from combining lending with underwriting are likely to be large. These results are robust to matching methodology developed by Heckman, Ichimura, and Todd (1997, 1998). For underwriters, tying helps build relationships that augment an underwriter's expected revenues by increasing the probability of receiving both current and future business. Both commercial banks and investment banks tie lending and underwriting and offer price discounts, albeit in different ways, with commercial banks discounting loan yield spreads and investment banks offering reduced underwriter spreads. ER -