Real Effects of Investment Banking Relationships: Evidence from the Financial Crisis
36 Pages Posted: 7 Feb 2014 Last revised: 1 Sep 2015
Date Written: August 21, 2015
Abstract
In this paper, we investigate the damage to real-sector investment spending and corporate financing activities triggered by the failure of three major investment banks during the 2007-09 financial crisis. We find that firms characterized by pre-crisis corporate investment banking relationships with troubled investment banks exhibit significantly lower post-crisis investment spending activity and securities issuance compared to corporations that were not affiliated with the troubled institutions. The effect varies systematically with the nature and strength of the investment banking relationship. Our results are robust with respect to various modifications and extensions of our empirical design and generally inconsistent with alternative explanations unrelated to investment banking relationships.
Keywords: firm-underwriter relationship, investment banking, financial crisis, financial shocks, real effects, investment, financing, cash holdings
JEL Classification: C78, G24, G32, L14
Suggested Citation: Suggested Citation