Information Asymmetries, Cross-Product Banking Mergers, and the Effects on Corporate Borrowers

Abstract

Commercial banks have radically expanded their underwriting capabilities by merging with investment banks. While corporations that both borrow from banks and access public markets may benefit from relationships with merged commercial-investment banks due to scope economies, they may be harmed if mergers increase banks' bargaining power. Using a hand-matched dataset of loans, borrowers, and lenders, this paper provides evidence that corporate borrowers benefit from these mergers. First, borrowers who also issue public securities, particularly unrated firms for whom informational economies of scope are likely to be substantial, are more likely to switch lenders to a merged commercial-investment bank when their existing lenders are pure commercial banks. This suggests that the mergers provide benefits to borrowers which exceed the costs of switching lenders. Second, a direct benefit is lower borrowing costs - commercial-investment banks charge loan yield spreads to borrowers who issue public securities that are 24 to 29 basis points lower than pure commercial banks. Loan yield spread discounts are large and significant when borrowers are unrated and start a new lending relationship.