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Underwriting by Commercial Banks: Incentive Conflicts, Scope Economies, and Project Quality

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  • Kanatas, George
  • Qi, Jianping
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    Abstract

    The authors study the issue of commercial bank underwriting of securities. Their analysis examines the incentive conflict faced by intermediaries that both lend and underwrite securities, thereby imposing a cost on their customers seeking to raise capital. Despite this cost, firms may choose to use such an intermediary if there are sufficiently large scope economies in combined lending and underwriting. The authors demonstrate that the regulatory separation of such combined intermediation may be optimal if firms recognize the intermediary's subsequent incentive conflict when choosing projects to be funded and if there is a social cost to bank funding of poor quality projects. They also examine the conditions for intermediaries' reputation building to mitigate the incentive conflict, without the need for regulation.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 30 (1998)
    Issue (Month): 1 (February)
    Pages: 119-33

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    Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:119-33

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. HAKIMI Abdelaziz & Ahmet DKHILI Hichem & KHLAIFIA Wafa, 2012. "Universal Banking and Credit Risk: Evidence from Tunisia," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 496-504.
    2. Carow, Kenneth A. & Kane, Edward J., 2002. "Event-study evidence of the value of relaxing long-standing regulatory restraints on banks, 1970-2000," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 439-463.
    3. Hans Gersbach & Harald Uhlig, 2006. "On the Coexistence of Banks and Markets," SFB 649 Discussion Papers SFB649DP2006-054, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Chaplinsky, Susan & Erwin, Gayle R., 2009. "Great expectations: Banks as equity underwriters," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 380-389, February.
    5. Berger, Allen N. & Cummins, J. David & Weiss, Mary A. & Zi, Hongmin, 2000. "Conglomeration versus Strategic Focus: Evidence from the Insurance Industry," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 323-362, October.
    6. Konishi, Masaru, 2002. "Intertemporal Rent-Seeking in the Banking Industry and Underwriting by Commercial Banks," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 37(1), pages 25-38, January.
    7. Neale, Faith R. & Peterson, Pamela P., 2005. "The effect of the Gramm-Leach-Bliley Act on the insurance industry," Journal of Economics and Business, Elsevier, vol. 57(4), pages 317-338.
    8. Philip E. Strahan, 2013. "Too Big to Fail: Causes, Consequences, and Policy Responses," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 43-61, November.
    9. Lóránth, Gyöngyi & Morrison, Alan, 2008. "Bank Diversification and Incentives," CEPR Discussion Papers 7051, C.E.P.R. Discussion Papers.
    10. Bulan, Laarni & Hull, Tyler, 2013. "The impact of technical defaults on dividend policy," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 814-823.

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