IDEAS home Printed from https://ideas.repec.org/p/zbw/cfswop/200627.html
   My bibliography  Save this paper

Tying lending and underwriting: Scope economies, incentives, and reputation

Author

Listed:
  • Laux, Christian
  • Walz, Uwe

Abstract

Informational economies of scope between lending and underwriting are a mixed blessing for universal banks. While they can reduce the cost of raising capital for a firm, they also reduce incentives in the underwriting business. We show that tying lending and underwriting helps to overcome this dilemma. First, risky debt in tied deals works as a bond to increase underwriting incentives. Second, with limitations on contracting, tying reduces the underwriting rents as the additional incentives from debt can substitute for monetary incentives. In addition, reducing the yield on the tied debt is a means to pay for the rent in the underwriting business and to transfer informational benefits to the client. Thus, tying is a double edged sword for universal banks. It helps to compete against specialized investment banks, but it can reduce the rent to be earned in investment banking when universal banks compete against each other. We derive several empirical predictions regarding the characteristics of tied deals.

Suggested Citation

  • Laux, Christian & Walz, Uwe, 2006. "Tying lending and underwriting: Scope economies, incentives, and reputation," CFS Working Paper Series 2006/27, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200627
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/25493/1/527429171.PDF
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ayako Yasuda, 2005. "Do Bank Relationships Affect the Firm's Underwriter Choice in the Corporate‐Bond Underwriting Market?," Journal of Finance, American Finance Association, vol. 60(3), pages 1259-1292, June.
    2. 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.
    3. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August.
    4. Hsuan‐Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, June.
    5. Kroszner, Randall S & Rajan, Raghuram G, 1994. "Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933," American Economic Review, American Economic Association, vol. 84(4), pages 810-832, September.
    6. George Kanatas & Jianping Qi, 2003. "Integration of Lending and Underwriting: Implications of Scope Economies," Journal of Finance, American Finance Association, vol. 58(3), pages 1167-1191, June.
    7. Puri, Manju, 1999. "Commercial banks as underwriters: implications for the going public process," Journal of Financial Economics, Elsevier, vol. 54(2), pages 133-163, October.
    8. 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.
    9. 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.
    10. Hakenes, Hendrik, 2004. "Banks as delegated risk managers," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2399-2426, October.
    11. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
    12. 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.
    13. 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.
    Full references (including those not matched with items on IDEAS)

    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. Krishnan, Karthik, 2013. "Commercial banks getting underwriting business: Tying or business building?," Journal of Economics and Business, Elsevier, vol. 66(C), pages 47-75.
    2. 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.
    3. Yasuda, Ayako, 2007. "Bank relationships and underwriter competition: Evidence from Japan," Journal of Financial Economics, Elsevier, vol. 86(2), pages 369-404, November.
    4. 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.
    5. Benzoni, Luca & Schenone, Carola, 2010. "Conflict of interest and certification in the U.S. IPO market," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 235-254, April.
    6. Sun, Yue & Uchida, Konari & Matsumoto, Mamoru, 2013. "The dark side of independent venture capitalists: Evidence from Japan," Pacific-Basin Finance Journal, Elsevier, vol. 24(C), pages 279-300.
    7. 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.
    8. Mehran, Hamid & Stulz, Rene M., 2007. "The economics of conflicts of interest in financial institutions," Journal of Financial Economics, Elsevier, vol. 85(2), pages 267-296, August.
    9. Focarelli, Dario & Pozzolo, Alberto Franco, 2005. "Conflicts of Interest in Financial Markets - Evidence from Bond Underwriting in the Nineties," Economics & Statistics Discussion Papers esdp05023, University of Molise, Department of Economics.
    10. 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.
    11. Carow, Kenneth A. & Heron, Randall A., 2002. "Capital market reactions to the passage of the Financial Services Modernization Act of 1999," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 465-485.
    12. Christian Andres & André Betzer & Peter Limbach, 2013. "Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds," Schumpeter Discussion Papers SDP13006, Universitätsbibliothek Wuppertal, University Library.
    13. 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.
    14. 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.
    15. 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," Nova SBE Working Paper Series wp596, Universidade Nova de Lisboa, Nova School of Business and Economics.
    16. Liu, Wenchien & Miu, Peter & Chang, Yuanchen & Ozdemir, Bogie, 2012. "Information asymmetry and bank regulation: Can the spread of debt contracts be explained by recovery rates?," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 123-150.
    17. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2021. "Non-pricing drivers of underwriters’ market shares in corporate bond markets," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 671-693.
    18. Andres, Christian & Betzer, André & Limbach, Peter, 2014. "Underwriter reputation and the quality of certification: Evidence from high-yield bonds," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 97-115.
    19. Ivan Roten & Donald Mullineaux, 2005. "Equity Underwriting Spreads at Commercial Bank Holding Companies and Investment Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(3), pages 243-258, September.
    20. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2021. "The impact of lending relationships on the choice and structure of bond underwriting syndicates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).

    More about this item

    Keywords

    Tying; Investment Banking; Universal Banking;
    All these keywords.

    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
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other

    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:zbw:cfswop:200627. 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: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/ifkcfde.html .

    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.