Relationship Banking and the Pricing of Financial Services / Charles Calomiris, Thanavut Pornrojnangkool.

Format:

Book

Author/Creator:

Calomiris, Charles.

Contributor:

National Bureau of Economic Research.

Pornrojnangkool, Thanavut.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12622.

NBER working paper series no. w12622

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

We investigate how banking relationships that combine lending and underwriting services affect the terms of lending, through both loan supply- and loan demand-side effects, and the underwriting costs of debt and equity issues. We capture and control for firm characteristics, including differences in the sequences of firm financing decisions (which we argue are likely to capture important cross-sectional heterogeneity, and which previously have been ignored in the literature). We construct a structural model of lending, which separately identifies loan supply and loan demand. Our approach results in significant improvement in the explanatory power of our regressions when compared to prior studies. We find no evidence that universal banks under-price loans to win underwriting business. Instead, we find that universal banks charge premiums for loans and underwriting services to extract value from combined lending and underwriting relationships. We also find that universal banks (as opposed to stand alone investment banks) enjoy cost advantages in both lending and underwriting, irrespective of relationship benefits. Part of the advantage borrowers may enjoy from bundling products may be a form of liquidity risk insurance, which is manifested in a reduced demand for lines of credit. We also find evidence of a “road show� effect; firms that engage in debt underwritings enjoy loan pricing discounts on the loans that are negotiated at times close to the debt underwritings.

Notes:

Print version record

October 2006.