IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v89y2008i2p253-267.html
   My bibliography  Save this article

On the importance of retail banking relationships

Author

Listed:
  • Puri, Manju
  • Rocholl, Jörg

Abstract

We use proprietary data to analyze the importance of retail banking relationships to commercial banks and their depositors when banks underwrite securities. We find lead underwriters' retail customers benefit as they demand and end up with significantly more of the highly underpriced issues. We find it is actual underpricing beyond that predicted by grey markets that drive the differential demand from the lead bank retail clientele, suggesting that banks pass on information about underpriced initial public offerings to their retail depositors. We analyze banks' incentives for such behavior and find evidence of banks benefiting through retail cross-selling--both brokerage accounts and consumer loans increase significantly.

Suggested Citation

  • Puri, Manju & Rocholl, Jörg, 2008. "On the importance of retail banking relationships," Journal of Financial Economics, Elsevier, vol. 89(2), pages 253-267, August.
    • Handle: RePEc:eee:jfinec:v:89:y:2008:i:2:p:253-267
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(08)00045-7
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lummer, Scott L. & McConnell, John J., 1989. "Further evidence on the bank lending process and the capital-market response to bank loan agreements," Journal of Financial Economics, Elsevier, vol. 25(1), pages 99-122, November.
    2. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    3. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    4. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
    5. Puri, Manju, 1996. "Commercial banks in investment banking Conflict of interest or certification role?," Journal of Financial Economics, Elsevier, vol. 40(3), pages 373-401, March.
    6. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    7. James, Christopher & Wier, Peggy, 1990. "Borrowing relationships, intermediation, and the cost of issuing public securities," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 149-171.
    8. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. "The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
    9. Bharath, Sreedhar & Dahiya, Sandeep & Saunders, Anthony & Srinivasan, Anand, 2007. "So what do I get? The bank's view of lending relationships," Journal of Financial Economics, Elsevier, vol. 85(2), pages 368-419, August.
    10. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    11. Reena Aggarwal & Nagpurnanand R. Prabhala & Manju Puri, 2002. "Institutional Allocation in Initial Public Offerings: Empirical Evidence," Journal of Finance, American Finance Association, vol. 57(3), pages 1421-1442, June.
    12. James, Christopher, 1992. "Relationship-Specific Assets and the Pricing of Underwriter Services," Journal of Finance, American Finance Association, vol. 47(5), pages 1865-1885, December.
    13. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    14. Steven Drucker & Manju Puri, 2005. "On the Benefits of Concurrent Lending and Underwriting," Journal of Finance, American Finance Association, vol. 60(6), pages 2763-2799, December.
    15. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
    16. Gande, Amar, et al, 1997. "Bank Underwriting of Debt Securities: Modern Evidence," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1175-1202.
    17. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wolfgang Bessler & Matthias Stanzel, 2009. "Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting," European Financial Management, European Financial Management Association, vol. 15(4), pages 757-786, September.
    2. Murinde, Victor & Rizopoulos, Efthymios & Zachariadis, Markos, 2022. "The impact of the FinTech revolution on the future of banking: Opportunities and risks," International Review of Financial Analysis, Elsevier, vol. 81(C).
    3. Nadja Dwenger & Frank M Fossen & Martin Simmler, 2015. "From financial to real economic crisis: evidence from individual firm¨Cbank relationships in Germany," Working Papers 1516, Oxford University Centre for Business Taxation.
    4. Chuluun, Tuugi, 2015. "The role of underwriter peer networks in IPOs," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 62-78.
    5. Mr. Arnoud W.A. Boot & Peter Hoffmann & Mr. Luc Laeven & Mr. Lev Ratnovski, 2020. "Financial Intermediation and Technology: What’s Old, What’s New?," IMF Working Papers 2020/161, International Monetary Fund.
    6. Dwenger, Nadja & Fossen, Frank M. & Simmler, Martin, 2015. "From financial to real economic crisis: Evidence from individual firm-bank relationships in Germany," Discussion Papers 2015/28, Free University Berlin, School of Business & Economics.
    7. repec:ecb:ecbdps:202010 is not listed on IDEAS
    8. Sumit Agarwal & Brent W. Ambrose & Souphala Chomsisengphet & Chunlin Liu, 2011. "The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 633-655, June.
    9. Tali Bank & Nimrod Segev & Maya Shaton, 2023. "Relationship Banking and Credit Scores: Evidence from a Natural Experiment," Bank of Israel Working Papers 2023.05, Bank of Israel.
    10. Xudong An & Sadok El Ghoul & Omrane Guedhami & Ross Levine & Raluca Roman, 2023. "Social Capital and Mortgages," Working Papers 23-23, Federal Reserve Bank of Philadelphia.
    11. Rocholl, Jrg, 2009. "A friend in need is a friend indeed: Allocation and demand in IPO bookbuilding," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 284-310, April.
    12. Li, Yi, 2021. "Reciprocal lending relationships in shadow banking," Journal of Financial Economics, Elsevier, vol. 141(2), pages 600-619.
    13. Jin, Justin Yiqiang & Kanagaretnam, Kiridaran & Liu, Yi, 2018. "Banks' funding structure and earnings quality," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 163-178.
    14. Laeven, Luc & Boot, Arnoud & Hoffmann, Peter & Ratnovski, Lev, 2020. "Financial Intermediation and Technology: What’s Old, What’s New?," CEPR Discussion Papers 15004, C.E.P.R. Discussion Papers.
    15. Lartey, Theophilus & James, Gregory A. & Danso, Albert & Boateng, Agyenim, 2022. "Bank business models, failure risk and earnings opacity: A short- versus long-term perspective," International Review of Financial Analysis, Elsevier, vol. 80(C).
    16. Santikian, Lori, 2014. "The ties that bind: Bank relationships and small business lending," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 177-213.
    17. Allen, Linda & Gottesman, Aron A. & Peng, Lin, 2012. "The impact of joint participation on liquidity in equity and syndicated bank loan markets," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 50-78.
    18. Marko Jakšič & Matej Marinč, 2019. "Relationship banking and information technology: the role of artificial intelligence and FinTech," Risk Management, Palgrave Macmillan, vol. 21(1), pages 1-18, March.
    19. Boot, Arnoud & Hoffmann, Peter & Laeven, Luc & Ratnovski, Lev, 2021. "Fintech: what’s old, what’s new?," Journal of Financial Stability, Elsevier, vol. 53(C).
    20. Sérgio Leão & Rafael Schiozer & Raquel F. Oliveira & Gustavo Araujo, 2022. "Lending Relationships and Currency Hedging," Working Papers Series 565, Central Bank of Brazil, Research Department.
    21. Behr, Patrick & Sonnekalb, Simon, 2012. "The effect of information sharing between lenders on access to credit, cost of credit, and loan performance – Evidence from a credit registry introduction," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3017-3032.
    22. Chun Chang & Guanmin Liao & Xiaoyun Yu & Zheng Ni, 2014. "Information from Relationship Lending: Evidence from Loan Defaults in China," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1225-1257, September.
    23. Neuhann, Daniel & Saidi, Farzad, 2018. "Do universal banks finance riskier but more productive firms?," Journal of Financial Economics, Elsevier, vol. 128(1), pages 66-85.
    24. Allen N. Berger & Christa H. S. Bouwman & Lars Norden & Raluca A. Roman & Gregory F. Udell & Teng Wang, 2021. "Piercing Through Opacity: Relationships and Credit Card Lending to Consumers and Small Businesses During Normal Times and the COVID-19 Crisis," Working Papers 21-19, Federal Reserve Bank of Philadelphia.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rocholl, Jörg & Puri, Manju & Steffen, Sascha, 2011. "On the importance of prior relationships in bank loans to retail customers," Working Paper Series 1395, European Central Bank.
    2. Yasuda, Ayako, 2007. "Bank relationships and underwriter competition: Evidence from Japan," Journal of Financial Economics, Elsevier, vol. 86(2), pages 369-404, November.
    3. David P. Ely & Kenneth J. Robinson, 2004. "The impact of banks' expanded securities powers on small‐business lending," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 79-102.
    4. Santikian, Lori, 2014. "The ties that bind: Bank relationships and small business lending," Journal of Financial Intermediation, Elsevier, vol. 23(2), pages 177-213.
    5. Kutsuna, Kenji & Smith, Janet Kiholm & Smith, Richard L., 2007. "Banking relationships and access to equity capital markets: Evidence from Japan's main bank system," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 335-360, February.
    6. Tetyana Balyuk & Nagpurnanand R. Prabhala & Manju Puri, 2020. "Indirect Costs of Government Aid and Intermediary Supply Effects: Lessons From the Paycheck Protection Program," NBER Working Papers 28114, National Bureau of Economic Research, Inc.
    7. Bouwman, Christa H. S., 2013. "Liquidity: How Banks Create It and How It Should Be Regulated," Working Papers 13-32, University of Pennsylvania, Wharton School, Weiss Center.
    8. João Santos, 1998. "Commercial Banks in the Securities Business: A Review," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(1), pages 35-60, July.
    9. Yoshiaki Ogura, 2017. "The Certification Role of pre-IPO Banking Relationships: Evidence from IPO Underpricing in Japan," The Japanese Economic Review, Springer, vol. 68(2), pages 257-278, June.
    10. Hao, Xiangchao & Shi, Jing & Yang, Jian, 2014. "The differential impact of the bank–firm relationship on IPO underpricing: evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 207-232.
    11. Duarte-Silva, Tiago, 2010. "The market for certification by external parties: Evidence from underwriting and banking relationships," Journal of Financial Economics, Elsevier, vol. 98(3), pages 568-582, December.
    12. Ting Chen & Xiumin Martin, 2011. "Do Bank‐Affiliated Analysts Benefit from Lending Relationships?," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 633-675, June.
    13. Elsas, Ralf & Krahnen, Jan Pieter, 2003. "Universal Banks and Relationships with Firms," CFS Working Paper Series 2003/20, Center for Financial Studies (CFS).
    14. Brewer, Elijah III & Genay, Hesna & Hunter, William Curt & Kaufman, George G., 2003. "The value of banking relationships during a financial crisis: Evidence from failures of Japanese banks," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 233-262, September.
    15. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    16. Gonzalez, Laura & James, Christopher, 2007. "Banks and bubbles: How good are bankers at spotting winners?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 40-70, October.
    17. Manoj Athavale & Robert O. Edmister, 2004. "The Pricing of Sequential Bank Loans," The Financial Review, Eastern Finance Association, vol. 39(2), pages 231-253, May.
    18. Shin, G. Hwan & Kolari, James W., 2004. "Do some lenders have information advantages? Evidence from Japanese credit market data," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2331-2351, October.
    19. Shin, G. Hwan & Fraser, Donald R. & Kolari, James W., 2003. "How does banking industry consolidation affect bank-firm relationships? Evidence from a large Japanese bank merger," Pacific-Basin Finance Journal, Elsevier, vol. 11(3), pages 285-304, July.
    20. Keil, Jan, 2023. "Lending relationships when creditors are in control," Journal of Corporate Finance, Elsevier, vol. 79(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:89:y:2008:i:2:p:253-267. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.