It is rare that an abstract summarizes a paper's findings as well as this one, so I will let the abstract give his findings:
"[Commercial] 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."While the findings are in the abstract, the implications and interpretations are really what matters and for these, you have to read the paper.
- Commercial banks made quick progress in gaining market share from investment bankers: "Between 1993 and 1996, the top ten investment banks’ collective
market share was 11 percentage points less than it had been between 1985 and 1988
(from 87% to 76%) while the top five commercial banks collectively accounted for 13% of
corporate-bond underwriting." This success stems from both lowering fees and relationships with the borrowing firms.
- The data includes over 1,500 firms from 1993-1997 and also has their bank relationships.
- Not surprisingly, existing bank relationships are most important where information asymmetries are most important: low rated firms.
- Fees are lower when there is already an existing relationship in place: "there is a significant fee discount when there are relationships between the firms and commercial banks."
- <>Just because a bank is in the syndicate for one loan does not necessarily increase odds of being selected to underwrite another loan in the future. However, the closer the relationship between firm and bank, the more likely the bank will be selected in the future to underwrite a loan. In other words, there are relationships and then there are relationships. >
"This finding supports the view that only top-tier members of syndicates are engaged in information production about the borrower firms, while lower-tier members are merely invited by arranger banks forrisk-sharing purposes and do not gain any informational advantage about the firms.">
So why the lower fees? Probably because the information costs are lower at firms where there is an existing relationship. And this cost savings is being passed on to the issuing firm.
A great read!
Yasuda's paper is forthcoming in the Journal of Finance.
An earlier version is available on SSRN.
As an unpaid endorsement, I want to say that The Journal of Finance is probably my favorite Journal. Sure there are others that are close (obviously JFE), but the ability to constantly find really insightful papers sets the Journal of Finance above the rest. It should come with a warning however: Reading many interesting Finance papers available, is habit forming and may be the cause of a very messy desk! lol...