Carola Schenone

Investment-Banking Relationships: 1933-2007

We study the evolution of investment bank relationships with issuers from 1933-2007. The degree to which issuers conditioned upon prior relationship strength when selecting an investment bank declined steadily after the 1960s. The issuers probability of selecting a bank with strong relationships with its competitors also declined after the 1970s. In contrast, issuers have placed an increasing emphasis upon the quantity and the quality of their investment banks connections with other banks. We relate the structural changes in bank/client relationships beginning in the 1970s to technological changes that altered the institutional constraints under which security issuance occurs.

Conflict of Interest or Certification? Evidence from IPOs Underwritten by the Firm's Relationship Bank

We examine the long-term return performance and fundamental valuation of IPOs underwritten by relationship banks. We find that over one- to three-year horizons these IPOs yield returns similar to those on IPOs underwritten by non-relationship banks. Moreover, we show that there is selection among firms that go public with their relationship bank. Investors value these new issues higher than similar IPOs underwritten by non-relationship banks. These findings support the certification role of relationship banks and suggest that, in this respect, the effect of the 1999 repeal of Sections 20 and 32 of the Glass-Steagall Act has not been negative.