Does Joint Production of Lending and Underwriting Help or Hurt Firms? A Fixed Effects Approach

Abstract

The relaxation of restrictions on commercial bank underwriting, culminated in the passage of the Financial Services Modernization Act of 1999, has initiated a major change in debt underwriting markets facing borrowing firms, as financial institutions are now able to jointly produce private lending and corporate debt underwriting services. Using fixed effects regressions on a panel of 4553 debt issues by 509 firms from 1990 to 2003, I find that issuing firms receive a 10 to 15 percent reduction in underwriting fees, which is driven by commercial banks jointly offering lending and underwriting services. I show firms are no more locked in to financial relationships after deregulation than before, and that issuing firms add multiple lead managers to prevent a lending commercial bank underwriter from gaining too much power over the firm. While a number of papers analyze commercial bank entry, this paper is the first to use the effect of exogenous deregulation on within-firm variation over time to estimate key parameters. This methodological contribution is important; I show that cross section (or pooled) regressions produce biased and inconsistent estimates of the effect of commercial banks on yield spreads. The fixed effects strategy employed here calls into question the result in previous research that commercial banks obtain lower yield spreads for borrowing firms.

Keywords: Universal banking, debt underwriting

JEL Classification: G21, G24, G32