Abstract

http://ssrn.com/abstract=45322
 
 

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Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities before the Glass-Steagall Act


Randall S. Kroszner


Booth School of Business, University of Chicago; National Bureau of Economic Research (NBER)

Raghuram G. Rajan


University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

March 1997


Abstract:     
We examine the two ways in which U.S. commercial banks organized their investment banking operations before the 1933 Glass-Steagall Act forced the banks to leave the securities
business: as an internal securities department within the bank and as a separately incorporated affiliate with its own board of directors. While departments underwrote seemingly higher
quality firms and securities than did comparable affiliates, the departments obtained lower prices for the issues they underwrote. The higher risk premium associated with the internal department is consistent with investors discounting for the greater likelihood of conflicts of interest when lending and underwriting are within the same structure. As a result, commercial banks evolved toward choosing the separate affiliate structure. Our results suggest that internal structure is an effective commitment mechanism, and absent other distortions, market pressures would propel banks to adopt an internal structure that would address regulators' concerns about conflicts of interest.

Number of Pages in PDF File: 45

JEL Classification: G21, G24, L22, N22

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Date posted: December 7, 1997  

Suggested Citation

Kroszner, Randall S. and Rajan, Raghuram G., Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities before the Glass-Steagall Act (March 1997). Available at SSRN: http://ssrn.com/abstract=45322 or http://dx.doi.org/10.2139/ssrn.45322

Contact Information

Randall S. Kroszner (Contact Author)
Booth School of Business, University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8779 (Phone)
773-702-0458 (Fax)
HOME PAGE: http://gsbwww.uchicago.edu/fac/randall.kroszner/re
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Raghuram G. Rajan
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
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