Abstract
Article 65 of the Securities and Exchange Law of Japan, which was carried into effect in 1948, prohibited banks from underwriting corporate securities partially because of the concern that combining the banking and securities businesses might result in a potential conflict of interest. This paper studies the pricing and long-term default performance of industrial bonds underwritten by commercial banks, the Industrial Bank of Japan (IBJ), and trust firms as compared to those underwritten by investment houses during the pre-war period in Japan when banks were allowed to underwrite industrial bonds. The evidence rejects the concern about the conflicts of interest.
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