Do Bank Bailouts Have an Impact on the Underwriting Business?

Abstract

In this paper, we explore the effects of bank bailouts on competition in the underwriting business. Using all the bailout measures on underwriters active in the European corporate bond markets from 2006–2013, we find that banks with large market shares (reputable banks) suffer market share losses (of 18.98%) after being bailed out, while a market share increase (of 33.55%) for those with smaller market shares (non-reputable underwriters). An exploration of the firm–bank underwriting matching also shows that the probability of being chosen as underwriter in a given deal decreases for reputable bailed-out banks, while it increases for non-reputable bailed-out banks. These results provide evidence of the effects of bailouts on underwriting competition. However, the effects seem to differ depending on the ex-ante reputational capital of the bailed-out bank.