The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

Abstract

We examine the long-standing question of whether firms derive value from investment bank relationships by studying how the Lehman collapse affected industrial firms that received underwriting, advisory, analyst, and market-making services from Lehman. Equity underwriting clients experienced an abnormal return of around -5%, on average, in the 7 days surrounding Lehman's bankruptcy, amounting to $23 billion in aggregate risk-adjusted losses. Losses were especially severe for companies that had stronger and broader security underwriting relationships with Lehman or were smaller, younger, and more financially constrained. Other client groups were not adversely affected.

Credit Contagion Channels: Market Microstructure Evidence from Lehman Brothers’ Bankruptcy

“…They also demonstrate that banks with greater cosyndication with Lehman suffered more liquidity stress, indicating that Lehman's failure put more of the funding burden on other members of the syndicate and increased the likelihood that more firms would draw on their credit lines. Fernando, May, and Megginson (2011) investigate the value of investment banking relationships by exploring the impact of Lehman's bankruptcy on clients of its underwriting business. They find that firms that employed Lehman for equity offerings suffered during Lehman's bankruptcy.…”

“…They overcome these hurdles by using the sudden failure of a cooperative bank in India and a unique dataset that identifies exposure to study interbank contagion. 5 Some recent studies discussing various dimensions of the crisis triggered by Lehman include Ivashina and Scharfstein (2010), Fernando, May, andMegginson (2011), Jorion andZhang (2011) and Aragon and Strahan (2010). contagion have examined smaller firms with limited interconnectedness. Of note is Jorion and Zhang (2009) who focus on mostly industrial firms and a small group of financial institutions that went bankrupt, with their sample period ending before 2005.…”

Market response to syndicated loan announcements from high‐profile failed and acquiring banks during the global financial crisis

“…In the process we determine if there are systematic differences in lender and/or borrower characteristics of the failed and acquiring banks. Fernando et al (2012) examine the failure of Lehman Brothers. Client firms that were small, young and experiencing financial constraints were the most adversely affected.…”

Do Lending Relationships Affect Corporate Financial Policies?

“…I rely on the occurrence of bank-specific events, such as announcements of bank write-downs or downgrades in relationship banks' long-term credit ratings, with respect to a parent bank or the material subsidiary of a lender to identify lender-specific shocks, which typically indicate a significant threat to lending relationships. In a similar fashion, Fernando, May, and Megginson (2012), who also conduct an event study analysis, use the collapse of Lehman Brothers in 2008 as an instrument for lending relationships. I obtain year-end long-term credit ratings from S&P's RatingsXpress database (Blume et al, 1998;Amato and Furfine, 2004) as coverage of long-term ratings from Moody's is much more incomplete in comparison.…”