Competition in Investment Banking

Abstract:     
We construct a comprehensive measure of overall investment banking competitiveness for follow-on offerings that aggregates the various dimensions of competition such as fees, pricing accuracy, analyst recommendations, distributional abilities, market making prowess, debt offering capabilities, and overall reputation. The measure allows us to incorporate trade-offs that investment banks may use in competing for new or established clients. We find that firms who seek a higher reputation underwriter face relatively non-competitive markets. In contrast, firms who switch to similar-quality underwriters enjoy more intense competition among investment banks which manifests in lower fees and more optimistic recommendations. Investment banks do compete vigorously for some clients, with the level of competition related to the likelihood of gaining or losing clients. Finally, investment banks not performing up to market norms are more likely to be dropped in the follow-on offering.

Number of Pages in PDF File: 34

Keywords: Investment banking, equity offerings, underwriting, analyst recommendations, market making

JEL Classification: G24, G32

working papers series