Essays on the lending and underwriting industries

This dissertation consists of three essays on the evolution of the lending and underwriting industries in the US, after the relaxation of the provisions of the Glass Steagall Act in 1997. In the first essay, I test the widespread belief at the time of the deregulation that the entry of commercial banks into equity underwriting would be most beneficial for smaller, younger, more opaque firms. I estimate conditional logit models of lender and underwriter choice to show that, contrary to predictions, smaller unrated firms continue to choose specialized intermediaries for lending and equity underwriting. Conversely, larger rated companies use the same bank, either a commercial bank or an independent investment bank, for both services much more often. I also show that, consistent with theory, commercial banks have an advantage in providing commitment-based loans to larger, rated firms, whereas investment banks are able to compete with commercial banks in providing other loans to these firms. In the second essay, I investigate what benefit larger rated firms obtain from using the same bank for lending and equity underwriting. I find that for one-stop shopping benefits these firms, particularly firms rated below investment grade, by reducing their reliance on favorable market conditions for issuing equity and enabling them to issue equity more often. This holds true whether the one-stop provider is a commercial bank or an investment bank. The results in the paper support the hypothesis that one-stop relationships alleviate information asymmetry faced by these firms in the public markets. In the third essay, I use customer-level data from the underwriting industry to test the belief that mergers result in customer defection. I focus on the mergers between commercial banks and investment banks following the deregulation. I find that acquired investment banks lose more underwriting customers and gain fewer new ones in the first three years after the merger, compared to their own performance prior to the merger, and compared to the performance of un-acquired investment banks. The results appear consistent with the organizational economics literature on synergy-related costs of integration.