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

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  • Kanatas, George
  • Qi, Jianping

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.

Suggested Citation

  • Kanatas, George & Qi, Jianping, 1998. "Underwriting by Commercial Banks: Incentive Conflicts, Scope Economies, and Project Quality," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 119-133, February.
  • Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:119-33
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    Cited by:

    1. Choi, Jay Pil & Stefanadis, Christodoulos, 2015. "Monitoring, cross subsidies, and universal banking," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 48-55.
    2. Bulan, Laarni & Hull, Tyler, 2013. "The impact of technical defaults on dividend policy," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 814-823.
    3. 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.
    4. Hans Gersbach & Harald Uhlig, 2007. "On the Coexistence of Banks and Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 225-243, June.
    5. Chaplinsky, Susan & Erwin, Gayle R., 2009. "Great expectations: Banks as equity underwriters," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 380-389, February.
    6. repec:eee:quaeco:v:66:y:2017:i:c:p:259-264 is not listed on IDEAS
    7. Sayuri Shirai, 2001. "Searching for New Regulatory Frameworks for the Intermediate Financial Structure in Post-Crisis Asia," Center for Financial Institutions Working Papers 01-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Lamar Pierce, 2012. "Organizational Structure and the Limits of Knowledge Sharing: Incentive Conflict and Agency in Car Leasing," Management Science, INFORMS, vol. 58(6), pages 1106-1121, June.
    9. 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.
    10. Katsushi Suzuki & Kazuo Yamada, 2010. "Does the Intended Use of Proceeds and Bank's Characteristics Affect the Bank Underwriters' Certification Role? Evidence from Seasoned Equity Offerings," Discussion Papers 2010-55, Kobe University, Graduate School of Business Administration.
    11. Lóránth, Gyöngyi & Morrison, Alan, 2008. "Bank Diversification and Incentives," CEPR Discussion Papers 7051, C.E.P.R. Discussion Papers.
    12. repec:eee:corfin:v:45:y:2017:i:c:p:176-202 is not listed on IDEAS
    13. 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.
    14. 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.
    15. 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.
    16. repec:eee:jfinec:v:128:y:2018:i:1:p:66-85 is not listed on IDEAS
    17. 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.
    18. Antonio Gledson de Carvalho & Joao Amaro de Matos & Douglas Beserra Pinheiro & Marcio de Sa Mello, 2015. "Conflicts of Interest in the Underwriting of IPOs and Price Stabilization," FEUNL Working Paper Series wp596, Universidade Nova de Lisboa, Faculdade de Economia.

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