Integration of Lending and Underwriting: Implications of Scope Economies

Abstract

We present a model which informational economies of scope that provide a cost advantage to universal banks offering one-stop shopping for lending and underwriting services also enable these intermediaries to lock in their clients' subsequent business. This (limited) market power of universal banks reduces their incentive, relative to that of investment banks, to undertake costly effort underwriting their clients' securities. The consequent reduction firms' likelihood of successful security issues with universal bank underwriters prevents these intermediaries from using their scope economies to completely dominate their markets. Our analysis identifies economy, intermediary, and firm characteristics that motivate either the integration or segmentation of underwriting and bank lending. Our results also have implications for financial innovation and capital market development markets characterized by the integration of financial services. Some of our empirical implications have not been tested; others can be compared with findings Kroszner and Rajan (1994).