Do Bank Relationships Affect the Firm's Underwriter Choice in the Corporate‐Bond Underwriting Market?

Abstract

This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate-bond underwriting market following the 1989 commercial-bank entry. I find that bank relationships have positive and significant effects on a firm's underwriter choice, "over and above" their effects on fees. This result is sharply stronger for junk-bond issuers and first-time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect. Copyright 2005 by The American Finance Association.

Social capital and cross-selling within financial holding companies in an emerging economy

“…Jensen's argument differs from Rajan's in that while Jensen focuses on the transferable customer relationship as the major determinant and rationale for the cross-selling, Rajan emphasizes the role of tacit knowledge of customer's credit. Yasuda (2005) also provides evidence that bank relationships have positive impacts on a customer's underwriter choice, using U.S. data similar to Jensen's work. Similar to Rajan's argument, Yasuda's work emphasizes the information advantage the bank already has with the customer, and argues that the information 1 The core business of commercial banking is taking deposit and lending, and the spread between loan interest rate and deposit interest rate is the main source of their profits, with the (interest rate) spread risk and credit risk as the main sources of risks (Fabozzi & Modigliani, 2003).…”

“…However, the information is not fully available in financial markets. Through embedded ties, a commercial bank can access and accumulate the customer-specific information from past transaction experiences (Uzzi, 1999;Yasuda, 2005), through continuous monitoring process (Agarwal & Elston, 2001;Gorton & Schmid, 2000;Macey, 2000) or through friendship and family relationships (Hamilton, 1997;Peng & Luo, 2000;Yeung, 2006). In this manner, the commercial bank is able to pay less costs to investigate the credit of a customer and can therefore provide cheaper loan service.…”

“…Furthermore, the route or direction of cross-selling is not systematically studied in literature. While both Jensen (2003) and Yasuda (2005) focus mainly on cross-selling from the commercial banking division to the investment banking division, Kanatas and Qi (2003) argue that cross-selling can also be accomplished from the underwriting division to the commercial banking division. Based upon the discussion of necessary conditions for effective crossselling, this article also investigates the major route of cross-selling within an FHC, both conceptually and empirically.…”

“…Second, despite some evidence of cross-selling within the FHC (Jensen, 2003;Yasuda, 2005), the process and rationale of cross-selling still remain largely unclear. This paper studies this issue by examining the necessary conditions for effective cross-selling within an FHC.…”

“…They argue that in capital markets penalized by the problems of information asymmetry, establishing a financial holding company (FHC), which integrates operations in several financial markets under common governance and transfers customer-specific information among the FHC's divisions, can overcome the information asymmetry problems in financial markets and thus create synergies through cross-selling (Berger, 2003;Kanatas & Qi, 2003;Kroszner, 1996;Kroszner & Rajan, 1994Rajan, 1996;Walter, 1997;Yasuda, 2005).…”