Competition and the Structure of Vertical Relationships in Capital Markets

Abstract:     
We show that information flows between investment banks and firms issuing securities affect the pattern of bank-firm relationships and that shocks to these information flows affect the real economy. Firms appear disinclined to share investment banks with other firms in the same industry, but only when the firms engage in product-market competition. This is consistent with concerns about the disclosure of commercially sensitive information to strategic rivals governing firms' investment bank choices. Using exogenous shocks to information flows arising from mergers among banks, we show that the desire to avoid sharing investment banks has a substantial effect on firms' investment in capital stock. We discuss how these information effects might help us understand how the investment banking industry is structured, how banks compete, and how prices are set.

Keywords: Investment banking, Securities underwriting, Competition, Bank deregulation, Bank entry, Glass-Steagall Act, Commercial banks

JEL Classifications: G21, G24, G28, K22, L11, L14, L84

Working Paper Series