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On the Benefits of Concurrent Lending and Underwriting

Authors

  • STEVEN DRUCKER,

  • MANJU PURI

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    • Drucker is from the Graduate School of Business, Columbia University. Puri is from the Fuqua School of Business, Duke University and NBER. Puri is grateful to the Sloan Foundation for partial funding of this research. This paper was circulated earlier under the title “Tying knots: Lending to win equity underwriting business.” We thank James Booth, Mark Flannery, Jean Helwege, Jianping Qi, Tim Loughran, Rob Stambaugh (the editor), Steven Ongena, Andy Winton, an anonymous referee, and seminar participants at the Board of Governors, Washington D.C., the Federal Reserve Bank of San Francisco, Indiana University, INSEAD, London Business School, Stanford Graduate School of Business, the 2003 Financial Management Association International and Annual Meetings, the 2003 Federal Deposit Insurance Corporation Conference on Finance and Banking, the 2004 American Finance Association Meeting, the 2004 International Industrial Organization Conference, the 2004 Federal Reserve Bank of Chicago Conference on Bank Structure & Competition, and the 2004 Financial Intermediation Research Society Conference on Banking, Insurance, and Intermediation.

ABSTRACT

This paper examines whether there are efficiencies that benefit issuers and underwriters when a financial intermediary concurrently lends to an issuer while also underwriting its public securities offering. We find issuers, particularly noninvestment-grade issuers for whom informational economies of scope are likely to be large, benefit through lower underwriter fees and discounted loan yield spreads. Underwriters, both commercial banks as well as investment banks, engage in concurrent lending and provide price discounts, albeit in different ways. We find concurrent lending helps underwriters build relationships, increasing the probability of receiving current and future business.

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