Scaling the Hierarchy: How and Why Investment Banks Compete for Syndicate Co-Management Appointments

Abstract

We investigate why banks pressured research analysts to provide aggressive assessments ofissuing firms during the 1990s. This competitive strategy did little to directly increase a bank s chances of winning lead-management mandates and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research and even the mere provision of research coverage for the issuer (regardless of its direction) attract co-managementappointments. Co-management appointments are valuable because they help banks establishrelationships with issuers. These relationships, in turn, substantially increase their chances of winning more lucrative lead-management mandates in the future. This is true even in the presence of historically exclusive banking relationships. If recent regulatory reforms compromisethis entry mechanism, they may have the unintended consequence of diminishing competition among securities underwriters.

Keywords: Underwriting syndicates, Commercial banks, Glass-Steagall Act, Global Settlement, Analyst behavior