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

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