Coexistence and Specialization of Investment Banks and Commercial Banks: Evidence from Corporate Bond Underwriting

Abstract

Prior research documents that commercial banks underwrite bonds with lower net yields than investment banks and concludes that commercial banks are superior underwriters. However, such a conclusion is inconsistent with the observed prominent role of investment banks in underwriting. This paper demonstrates that the findings of prior research are driven by the empirical methodology employed. This methodology does not permit individual underwriters to possess different comparative advantages and to serve different clienteles. When such factors are included, the results are markedly different from those of prior studies. On average, both types of underwriters serve their bond-issuing clients better than the other would and obtain significantly higher bond prices for them. The findings demonstrate that firms select rationally between underwriter types, seeking to minimize the total costs of bond issuance.