The Role of Lending-Relationship Banks in the Underwriting of Seasoned Equity Offerings: Conflict of Interest or Certification?

North American Journal of Economics and Finance, Forthcoming

42 Pages Posted: 24 Jan 2014

See all articles by Hsuan‐Chi Chen

Hsuan‐Chi Chen

University of New Mexico - Anderson School of Management

De-Wai Chou

National Taiwan Normal Univeristy

Christine W. Lai

National Taiwan Normal University

Yi-Ting Yeh

Yuan Ze University

Date Written: January 22, 2014

Abstract

Sections 20 and 32 of the 1933 Glass-Steagall Act address a potential conflict of interest by banning commercial banks from the market for corporate securities underwriting. This restriction was officially rescinded in 1999 by the Gramm-Leach-Bliley Financial Modernization Act. In turn, this development has piqued the interest of scholars and renewed the debate on the role that commercial banks play, as well as the consequences of this role in equity offerings, which may either result in conflict of interest or certification. In this study, we comprehensively examine whether conflict of interest or certification more accurately characterizes the underwriting of seasoned equity offerings (SEOs) by lending-relationship banks. Overall, the results suggest that the presence of lending-relationship banks lowers the gross spreads and underpricing of SEOs. Furthermore, our evidence shows that SEOs led by lending-relationship banks exhibit better long-run performance than other SEOs, which supports the certification hypothesis.

Keywords: Certification, Conflict of Interest, Seasoned Equity Offering, Lending

JEL Classification: G21; G24

Suggested Citation

Chen, Hsuan-Chi and Chou, De-Wai and Lai, Christine W. and Yeh, Yi-Ting, The Role of Lending-Relationship Banks in the Underwriting of Seasoned Equity Offerings: Conflict of Interest or Certification? (January 22, 2014). North American Journal of Economics and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2383515

Hsuan-Chi Chen

University of New Mexico - Anderson School of Management ( email )

1924 Las Lomas NE
Albuquerque, NM 87131
United States

HOME PAGE: http://www.mgt.unm.edu/faculty/directoryArea.asp#FIN

De-Wai Chou (Contact Author)

National Taiwan Normal Univeristy ( email )

No.31 Shida Road
Taipei, Taiwan 106
Taiwan
+886 2 77343305 (Phone)

Christine W. Lai

National Taiwan Normal University ( email )

162, Hoping East Road, sec. 1
Taipei 106
Taiwan

Yi-Ting Yeh

Yuan Ze University ( email )

135, Far-East Rd., Chung-Li
Taoyuan, ROC
Taiwan

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