Great Expectations: Banks as Equity Underwriters

Abstract

We examine the in-roads commercial banks have made into equity underwriting over 1990-2002. While banks end the period handling upwards of 25% of equity underwriting, most of this increase results from acquisitions of investment banks with an already established market share of equity underwriting. These acquisitions provide an opportunity to gauge the potential advantages of bank affiliation to equity underwriting. We find a significant decline on average in the market share of equity underwriting that banks acquired in the post-merger period. This decline in market share is larger than that experienced by investment banks of comparable reputation. Among the reasons why banks lose market share is that post-merger they originate fewer IPOs and their IPOs have a lower incidence of follow-on SEOs compared to independent investment banks. Following the merger, banks experience a large fall-off in their ability to retain follow-on SEOs and are less successful in winning SEO mandates when an issuer switches from its IPO underwriter. Taken together, the findings indicate that banks have not been able to achieve scope economies in equity underwriting.

Keywords: equity issuance, investment banking, IPOs, SEOs

JEL Classification: G21, G24, G34