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Competition and the Structure of Vertical Relationships in Capital Markets

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  • John Asker
  • Alexander Ljungqvist

Abstract

We show that information flows between investment banks and their clients affect relationships and that shocks to these flows affect corporate investment. Firms avoid sharing investment banks in their industry, but only when they engage in product market competition. This suggests that concerns about disclosure of confidential information to strategic rivals determine firms' investment bank choices. Using exogenous shocks to information flows arising from bank mergers, we show that the desire to avoid sharing banks has a substantial effect on investment. These information effects help us understand how the investment banking industry is structured, how banks compete, and how prices are set. (c) 2010 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 118 (2010)
Issue (Month): 3 (06)
Pages: 599-647

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Handle: RePEc:ucp:jpolec:v:118:y:2010:i:3:p:599-647

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Web page: http://www.journals.uchicago.edu/JPE/

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References

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  1. Mariagiovanna Baccara & Ronny Razin, 2003. "From Thought to Practice: Appropriation and Endogenous Market Structure with Imperfect Intellectual Property Rights," Working Papers 03-11, New York University, Leonard N. Stern School of Business, Department of Economics.
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  8. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  9. W. Kip Viscusi & Joseph E. Harrington & John M. Vernon, 2005. "Economics of Regulation and Antitrust, 4th Edition," MIT Press Books, The MIT Press, edition 4, volume 1, number 026222075x, December.
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  12. Bhattacharya Sudipto & Chiesa Gabriella, 1995. "Proprietary Information, Financial Intermediation, and Research Incentives," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 328-357, October.
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  15. Mariagiovanna Baccara, 2008. "Outsourcing, Information Leakage and Consulting Firms," Working Papers 08-7, New York University, Leonard N. Stern School of Business, Department of Economics.
  16. Alexander Ljungqvist & Felicia Marston & William J. Wilhelm, 2009. "Scaling the Hierarchy: How and Why Investment Banks Compete for Syndicate Co-management Appointments," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3977-4007, October.
  17. Bharant N. Anand & Alexander Galetovic, 2000. "Relationships, Competition, and the Structure of Investment Banking Markets," Documentos de Trabajo 96, Centro de Economía Aplicada, Universidad de Chile.
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Citations

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Cited by:
  1. Kuhnen, Camelia M. & Niessen, Alexandra, 2010. "Public opinion and executive compensation," CFR Working Papers 08-09 [rev.], University of Cologne, Centre for Financial Research (CFR).
  2. Gumpert, Anna & Hines Jr, James R & Schnitzer, Monika, 2012. "The use of tax havens in exemption regimes," CEPR Discussion Papers 8943, C.E.P.R. Discussion Papers.
  3. Joseph J. Gerakos & Chad Syverson, 2013. "Competition in the Audit Market: Policy Implications," NBER Working Papers 19251, National Bureau of Economic Research, Inc.
  4. Carlo Cambini & Laura Rondi, 2011. "Independence, Investment and Political Interference: Evidence from the European Union," RSCAS Working Papers 2011/42, European University Institute.
  5. Grullon, Gustavo & Underwood, Shane & Weston, James P., 2014. "Comovement and investment banking networks," Journal of Financial Economics, Elsevier, vol. 113(1), pages 73-89.
  6. Brickley, James A. & Linck, James S. & Smith, Clifford W., 2012. "Vertical integration to avoid contracting with potential competitors: Evidence from bankers' banks," Journal of Financial Economics, Elsevier, vol. 105(1), pages 113-130.
  7. Bernardo Bortolotti & Carlo Cambini & Laura Rondi, 2011. "Regulatory Independence, Ownership and Firm Value: The Role of Political Institutions," RSCAS Working Papers 2011/43, European University Institute.
  8. Carlos Bellón, 2014. "Bank Competition, Borrower Competition and Interest Rates," Business Economics Working Papers id-14-03, Universidad Carlos III, Instituto sobre Desarrollo Empresarial "Carmen Vidal Ballester".
  9. Oesch, David & Schuette, Dustin & Walter, Ingo, . "Real Effects of Investment Banking Relationships: Evidence from the Financial Crisis," Working Papers on Finance 1405, University of St. Gallen, School of Finance.

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