Integration of Lending and Underwriting: Implications of Scope Economies

Abstract

Informational economies of scope that provide a cost advantage to universal banks offering "one-stop shopping" for lending and underwriting also enable these intermediaries to "lock in" their clients' subsequent business. This (interim) market power of universal banks reduces their incentive, relative to that of investment banks, to undertake costly effort in underwriting their clients' securities. Therefore, firms that employ universal bank underwriters are less likely to be successful in selling their securities at the best terms possible - this prevents such intermediaries from using their scope economies to completely dominate their markets. Our results have implications for financial innovation and capital market development in markets characterized by the integration of financial services. Our analysis also identifies economy, intermediary, and firm characteristics that motivate either the integration or segmentation of bank lending and underwriting.

Keywords: Financial integration, lending, underwriting, universal bank, scope economies, market power

JEL Classification: G21, G24, G28