Conflicts of Interest in Financial Markets - Evidence from Bond Underwriting in the Nineties
AbstractThis paper presents some new evidence on the conflict of interest that may arise when banks underwrite corporate securities and sell them to their customers. Two alternative views are confronted; a) that commercial banks possess private information on the financial condition of their clients and so perform better screening (the certification hypothesis); and b) that commercial banks might convert loans to firms in financial difficulties into bonds marketed to unsuspecting clients (the ‘naïve investor’ hypothesis). The empirical analysis compares the default rates between 2000 and 2002 of a sample of more than 5,000 securities issued from 1991 to 1999. Our results show that, on average, securities underwritten by investment houses and by commercial banks had the same probability of default. However, investment-grade issues underwritten by commercial banks had a lower probability of default than those underwritten by investment houses, while the reverse was true for noninvestment- grade issues. Based on this latter result, it is not possible to refute the ‘naïve investor’ hypothesis, as instead in Kroszner and Rajan (1994).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Molise, Dept. EGSeI in its series Economics & Statistics Discussion Papers with number esdp05023.
Length: 33 pages
Date of creation: 13 Jan 2005
Date of revision:
Conflicts of interest; Glass-Steagall Act; Securities underwriting; Default performance.;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ACC-2005-02-01 (Accounting & Auditing)
- NEP-ALL-2005-02-01 (All new papers)
- NEP-FIN-2005-02-01 (Finance)
- NEP-FMK-2005-02-01 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kroszner, Randall S. & Rajan, Raghuram G., 1997.
"Organization structure and credibility: Evidence from commercial bank securities activities before the Glass-Steagall Act,"
Journal of Monetary Economics,
Elsevier, vol. 39(3), pages 475-516, August.
- Randall S. Kroszner & Raghuram G. Rajan, 1995. "Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities Before the Glass-Steagall Act," NBER Working Papers 5256, National Bureau of Economic Research, Inc.
- Randall S. Kroszner & Raghuram G. Rajan, . "Organization Structure and Credibility: Evidence from Commercial Bank Securities Activities Before the Glass-Steagall Act," CRSP working papers 325, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Roten, Ivan C. & Mullineaux, Donald J., 2002. "Debt underwriting by commercial bank-affiliated firms and investment banks: More evidence," Journal of Banking & Finance, Elsevier, vol. 26(4), pages 689-718, April.
- Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
- Richard Blundell & Monica Costa Dias, 2002.
"Alternative approaches to evaluation in empirical microeconomics,"
CeMMAP working papers
CWP10/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Richard Blundell & Monica Costa Dias, 2009. "Alternative Approaches to Evaluation in Empirical Microeconomics," Journal of Human Resources, University of Wisconsin Press, vol. 44(3).
- Blundell, Richard & Costa Dias, Monica, 2008. "Alternative Approaches to Evaluation in Empirical Microeconomics," IZA Discussion Papers 3800, Institute for the Study of Labor (IZA).
- Richard Blundell & Monica Costa Dias, 2008. "Alternative approaches to evaluation in empirical microeconomics," CeMMAP working papers CWP26/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
- Richard Blundell & Mónica Costa Dias, 2008. "Alternative Approaches to Evaluation in Empirical Microeconomics," CEF.UP Working Papers 0805, Universidade do Porto, Faculdade de Economia do Porto.
- Gompers, Paul & Lerner, Josh, 1999.
"Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital,"
Journal of Law and Economics,
University of Chicago Press, vol. 42(1), pages 1-28, April.
- Paul Gompers & Josh Lerner, 1998. "Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital," NBER Working Papers 6847, National Bureau of Economic Research, Inc.
- Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
- Puri, Manju, 1994. "The long-term default performance of bank underwritten security issues," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 397-418, January.
- Saunders, Anthony & Stover, Roger D., 2004. "Commercial bank underwriting of credit-enhanced bonds: are there certification benefits to the issuer?," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 367-384, April.
- 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.
- Marcia Millon Cornett & Evren Ors & Hassan Tehranian, 2002. "Bank Performance around the Introduction of a Section 20 Subsidiary," Journal of Finance, American Finance Association, vol. 57(1), pages 501-521, 02.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Narayanan, Rajesh P. & Rangan, Kasturi P. & Rangan, N.K.Nanda K., 2004. "The role of syndicate structure in bank underwriting," Journal of Financial Economics, Elsevier, vol. 72(3), pages 555-580, June.
- Konishi, Masaru, 2002. "Bond underwriting by banks and conflicts of interest: Evidence from Japan during the pre-war period," Journal of Banking & Finance, Elsevier, vol. 26(4), pages 767-793, April.
- Gande, Amar & Puri, Manju & Saunders, Anthony, 1999. "Bank entry, competition, and the market for corporate securities underwriting," Journal of Financial Economics, Elsevier, vol. 54(2), pages 165-195, October.
- Steven Drucker & Manju Puri, 2004. "The Tying of Lending and Equity Underwriting," NBER Working Papers 10491, National Bureau of Economic Research, Inc.
- Ber, Hedva & Yafeh, Yishay & Yosha, Oved, 2001. "Conflict of interest in universal banking: Bank lending, stock underwriting, and fund management," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 189-218, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio Lupi).
If references are entirely missing, you can add them using this form.