The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers





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    • Fernando and Megginson are from the Price College of Business at the University of Oklahoma. May is from the W. Frank Barton School of Business at Wichita State University. We thank Jim Brau, Tim Burch, Agnes Chang, Jay Choi, Jonathan Clarke, Arnie Cowan, Louis Ederington, Sadok El Ghoul, Joseph Fan, Mark Flannery, Veljko Fotak, Xiaohui Gao, Vladimir Gatchev, Edith Ginglinger, Sridhar Gogineni, Radha Gopalan, Rob Hansen, Kate Holland, Ravi Jagannathan, Tomas Jandik, Ed Kane, Bill Lane, Ji-Chai Lin, Laura Lindsey, Alexander Ljungqvist, Brian Lucey, Joe Mason, Ron Masulis, Vikram Nanda, Rajesh Narayanan, Kasper Nielsen, Maureen O'Hara, Teodora Paligorova, Adrian Pop, Manju Puri, Vikas Raman, Raghavendra Rau, Jay Ritter, Scott Smart, Duane Stock, Hugh Thomas, Vahap Uysal, Kathleen Weiss Hanley, and seminar participants at the Chinese University of Hong Kong, the 2010 FMA-Europe conference in Hamburg, the 2010 FMA-Asia conference in Singapore, the 2010 FMA meeting (New York), the 2010 Financial Intermediation Research Society meeting (Florence), the 2010 INFINITI conference (Dublin), Louisiana State University, the 2010 Oklahoma Finance Conference, the 2011 AFA meetings, Université Paris Dauphine, the University of Hong Kong, and the University of Oklahoma for helpful discussions and comments. We thank two referees, an Associate Editor, and the Editor, Campbell Harvey, for suggestions that significantly improved the paper. A part of this research was conducted when Chitru Fernando was visiting at the SMU Cox School of Business and Bill Megginson was visiting at Université Paris-Dauphine (UPD) as a guest of the Fédération Bancaire Française (FBF) Chair in Corporate Finance. We thank SMU and UPD for their gracious hospitality and Mariusz Lysak for research assistance. We are responsible for any remaining errors.


We examine the long-standing question of whether firms derive value from investment bank relationships by studying how the Lehman collapse affected industrial firms that received underwriting, advisory, analyst, and market-making services from Lehman. Equity underwriting clients experienced an abnormal return of around −5%, on average, in the 7 days surrounding Lehman's bankruptcy, amounting to $23 billion in aggregate risk-adjusted losses. Losses were especially severe for companies that had stronger and broader security underwriting relationships with Lehman or were smaller, younger, and more financially constrained. Other client groups were not adversely affected.