The Failure of Drexel Burnham Lambert: Evidence on the Implications for Commercial Banks

Posted: 3 May 2000

See all articles by Lawrence M. Benveniste

Lawrence M. Benveniste

University of Minnesota - Twin Cities - Carlson School of Management

Manoj K. Singh

Bear, Stearns & Co., Inc.

William J. Wilhelm

University of Virginia - McIntire School of Commerce

Abstract

We argue that since bank loans and publicly traded sub- investment-grade debt, or junk bonds, are close substitutes for one another, the recent failure of Drexel Burnham Lambert created a competitive opportunity for commercial banks. Consistent with this hypothesis, we observe within the commercial banking industry a positive wealth effect associated with Drexel's failure. The distribution of the wealth effect across commercial banks and Drexel's investment banking rivals is consistent with the wealth effect being primarily a reflection of market expectations of a return to traditional intermediated funding of sub- investment-grade debt.

JEL Classification: G2

Suggested Citation

Benveniste, Lawrence M. and Singh, Manoj K. and Wilhelm, William J., The Failure of Drexel Burnham Lambert: Evidence on the Implications for Commercial Banks. Available at SSRN: https://ssrn.com/abstract=5807

Lawrence M. Benveniste

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
774 Management and Economics
Minneapolis, MN 55455
United States
612-624-4563 (Phone)
612-626-1335 (Fax)

Manoj K. Singh

Bear, Stearns & Co., Inc.

245 Park Avenue
New York, NY 10167
United States

William J. Wilhelm (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

Rouss & Robertson Halls, East Lawn
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-7666 (Phone)
434-924-7074 (Fax)

HOME PAGE: http://gates.comm.virginia.edu/wjw9a/

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