Client Effects of Changes in the Structure of the Investment Banking Industry

38 Pages Posted: 1 Mar 2021

See all articles by Alexander Borisov

Alexander Borisov

University of Cincinnati - Department of Finance - Real Estate

Ya Gao

University of Manitoba - Department of Accounting and Finance

Date Written: January 2019

Abstract

This paper examines the effects for client firms of changes in the investment banking industry that affect its structure and the business relationships between investment banks and client firms. Using an event study approach and a sample of consolidation activities in the industry, we show that firms that rely more on services provided by their investment banks experience significant negative abnormal returns upon announcement of a merger involving their bank as the target. The adverse effect is more pronounced for firms that are more likely to be financially constrained and is attenuated when the acquiring bank is more reputable or has larger underwriting capacity. We also show that the value effects are complemented by significant changes in the economic activity of client firms in terms of reduced investment and employment. We conduct several tests to establish the effects are indeed relationship-specific and not a reflection of unobservable deal or client characteristics.

Keywords: Investment Banking, Bank-firm Relationship, Mergers and Acquisitions, Event Study

JEL Classification: G24, G14, G34

Suggested Citation

Borisov, Alexander and Gao, Ya, Client Effects of Changes in the Structure of the Investment Banking Industry (January 2019). Available at SSRN: https://ssrn.com/abstract=3764050 or http://dx.doi.org/10.2139/ssrn.3764050

Alexander Borisov

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Ya Gao (Contact Author)

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

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