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 of U.S. commercial bank holding companies relative to those underwritten by investment houses. Our results show that Section 20 underwritings of lower-credit rated firms in which the bank has a lending stake, results in relatively higher prices (lower yields). We find no evidence of conflicts of interest in situations where one would expect large conflicts ex-ante, e.g., where the purpose of the bank underwriting is to repay existing bank debt. The results are generally consistent with the view that when banks underwrite debt securities of firms to which they lend (through their commercial banking affiliate) there is a net certification effect present. We also find that Section 20 subsidiaries 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.