Breaking Down the Barriers: Bank Competition and Underwriting Incentives Anil Shivdasani Wei-Ling Song Kenan-Flagler Business School E. J. Ourso College of Business University of North Carolina at Chapel Hill Louisiana State University Chapel Hill, NC 27599 Baton Rouge, LA 70803 Phone: (919) 962-6124 Phone: 225-578-6258 Fax: (919) 962-2068 Fax: 225-578-6366 Email:
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[email protected] December 2007 JEL classification: G21; G24; G28; K22; L14 Keywords: Bank entry, Banking deregulation, Underwriting, Certification, Investment banking We thank Matthias Kahl and Paolo Fulghieri and seminar participants at the University of North Carolina and Wharton’s Accounting group, and the Corporate Finance Conference at Indian School of Business for helpful comments. Shivdasani acknowledges support from UNC’s Wachovia Center for Corporate Finance, and Song acknowledges support from the Wharton Financial Institutions Center. Breaking Down the Barriers: Bank Competition and Underwriting Incentives Abstract We show how increased competition from the entry of commercial banks into the bond underwriting industry affected the incentives and screening efficacy of underwriters. During the 1996–2000 period, commercial banks stole significant market share from traditional investment banks. We show that in response to this increased competition, syndicate structure evolved to include multiple lead underwriters. The effect of co-led syndicate structure was to lower the incentives of lead underwriters to produce new information regarding issuer quality. We find that co-led syndicates experienced a higher frequency with which issuing firms were subsequently sued by shareholders in class-action lawsuits alleging financial misconduct. Our results highlight how increased market competition may have an adverse effect on the information production incentives of financial intermediaries.