[We provide evidence that commercial banks extend their reputation in underwriting syndicated loans and private placements (private debt) to their bond-underwriting activities. In the absence of bond market reputation, private-debt-market reputation enables commercial banks to win underwriting mandates from their loan clients. Furthermore, it allows them to credibly commit to investors against opportunistically using lending information and thereby deliver superior certification benefits in the form of higher issue prices relative to investment-bank underwriters. This pricing benefit is not offset by higher underwriting fees and thus results in lower total issuance costs for borrowers.]

This article provides evidence that firm value declines when credit default swaps (CDSs) are initiated and that the effect is greater when CDS trading activity is higher. This decline, which arises from an increase in the cost of capital as opposed to a decrease in free cash flows, traces to a deterioration in the firm’s credit quality and stock liquidity. Firm value declines less when CDS trading is likely to produce incremental information, suggesting that CDS trading has informational benefits for firm value. However, the evidence does not indicate that firm value increases because CDS availability facilitates investments.

Empty creditors—bondholders hedged with Credit Default Swaps (CDSs)—face incentives to holdout from “Distressed Exchanges” (DEs) of debt because the CDS hedge alters their payoffs to favor bankruptcy. We show using detailed data on DEs that firms respond to this holdout problem by targeting junior bondholders who are more likely to tender than senior bondholders. Furthermore, we show that doing so allows them to successfully reduce debt through the DE and avoid bankruptcy. Our evidence underscores the importance of the firm's response to the holdout problem in understanding the role of empty creditors in distress resolution.

The re-entry of banking organizations into securities underwriting raises concerns over the possibility of banks using their lending-generated private information to benefit themselves and the issuing firm at the expense of investors. This paper illustrates the use of syndicate structure by lending banks to credibly commit against such opportunistic behavior and to exploit their proprietary information to lower issuance cost for borrowing firm issuers. We show that lending banks predominantly comanage with a high reputation nonlending underwriter. We present evidence that, relative to investment banks, comanaging issues allows lending banks to lower issuance costs for borrowing firms.

We provide evidence that commercial banks extend their reputation in underwriting syndicated loans and private placements (private debt) to their bond-underwriting activities. In the absence of bond market reputation, private-debt-market reputation enables commercial banks to win underwriting mandates from their loan clients. Furthermore, it allows them to credibly commit to investors against opportunistically using lending information and thereby deliver superior certification benefits in the form of higher issue prices relative to investment-bank underwriters. This pricing benefit is not offset by higher underwriting fees and thus results in lower total issuance costs for borrowers.