Ch. 5: Banks in Capital Markets 213
yields,Hamao and Hoshi (2002)find weak evidence for conflicts of interest,Takaoka
and McKenzie (2006)find weak evidence of certification, andLiu and Kang (2004)find
no evidence of conflicts of interest in terms of differential effects between commercial
banks and investment banks.Takaoka and McKenzie (2006)additionally examine if
bank entry post-1993 lowered commissions and yields, and they find some supporting
evidence. Each of these papers has slightly different samples and methodology. Clearly
more research is needed here to answer this question.
Yasuda (2006)also examines the Japanese bond market after the Financial Systems
Reform Act but focuses on the effect of bank relationships on competition in the un-
derwriting market. Using a framework similar toYasuda (2005), the author estimates
a joint model of the gross spread and the firm’s selection of underwriter, allowing the
firm to choose between fifteen underwriters. The estimates indicate that having a prior
lending relationship significantly increases the probability of being selected as bond un-
derwriter, and stronger lending relationships increase the likelihood of selection by more
than weaker relationships. This is consistent with the evidence from the United States.
In addition, issuers are willing to pay a higher fee (+0.513%) for underwriting services
from banks with which they have pre-existing lending relationships, all else equal. This
suggests that banking relationships provide additional value to the firm. Interestingly,
the results inYasuda (2005)indicate that issuers in the United States are willing to
pay 1.238% more to use a relationship commercial bank as underwriter, which provides
some indication that there could be more benefits in the United States from issuers using
a relationship bank as underwriter.
5.2. Canada
In Canada, universal banking began after deregulation occurred in 1987. Within thirteen
months after the June 1987 change in law permitting bank entry, all six of Canada’s
chartered banks had an underwriting division. The commercial banks gained signifi-
cant market share during the following years.Ursel and Ljucovic (1998)examine the
relationship between commercial bank underwriting (as modeled by a dummy variable
that indicates if the underwriter is bank-owned) and underpricing using a data set of
111 Canadian IPOs between July 1987 and December 1994. The authors are limited
by data constraints that prevent them from tracking existing lending relationships be-
tween banks and firms, which would enable stronger conclusions. Using a parsimonious
specification, the authors find that commercial bank-underwritten issues have lower un-
derpricing, but after controlling for other important factors, such as reputation,Ursel
and Ljucovic (1998)no longer find a significant difference.
Hebb and Fraser (2002)examine the relationship between commercial bank under-
writing and bond yields using 356 non-convertible bond issues from 1987 to 1997. The
authors find that commercial bank underwritten issues have a yield that is lower by 20
basis points, consistent with commercial banks being net certifiers. For the issues where
the authors are able to identify the issuer’s primary lender they find that the existence of
a lending relationship does not affect bond yield spreads. The Canadian data from both