Bank Underwriting of Debt Securities: Modern Evidence

This paper examines recent evidence on the characteristics and pricing of debt securities underwritten by Section 20 subsidiaries (referred to as banks) of U.S. commercial bank holding companies compared to those underwritten by investment houses. Our results show that bank underwriting of lower credit rated issues, where the bank retains a significant stake (through its commercial banking affiliate), results in relatively higher prices. We find no evidence of conflicts of interest in situations where one would expect large conflicts ex-ante e.g., when the purpose of the bank underwriting is to repay existing bank debt. The results support the conclusion that when banks underwrite debt securities of firms to which they lend (through their commercial banking affiliate) there is a dominant net certification effect present - especially for lower credit rated issues. We also find that banks bring a relatively larger proportion of smaller sized issues to the market than investment houses. Thus, contrary to the contention that greater universal banking powers will stunt the availability of finance to smaller firms we find support for the view that bank underwriting is net beneficial to smaller firms.