Ch. 5: Banks in Capital Markets 221
at-issue yield spread (higher price) of a firm’s first public debt issuance. The authors fo-
cus on first debt issuances because firms issuing seasoned debt are already monitored by
public debtholders, which can make it difficult to distinguish if the private banking re-
lationship drives any results. Further, first public debt offers are undertaken by younger
and smaller firms, where asymmetric information is likely to be high.Datta, Iskandar-
Datta, and Patel (1999)collect a sample of 98 initial public offerings of straight debt
that occurred between 1971 and 1994 and determine that 64 firms have bank debt at
the time of public issuance. In their main specification, after controlling for firm and
bond characteristics, as well as differences in risk, the authors find that the existence of
a bank lending relationship during the year prior to the public debt issuance reduces the
at-issue yield spread of the first public bond offering by 84 basis points.^31
The findings in these two papers support the view that the existence of a bank relation-
ship reduces the information costs of accessing the public equity and debt markets. The
results are consistent with bank lending agreements being valuable because the exis-
tence of a banking relationship increases a firm’s public security prices. These findings
complement the evidence on the market’s reaction to loan announcements, renewals,
and sales in that they emphasize the importance of the information content of bank
loans.
- Extensions
Thus far, we have confined ourselves to the interaction of banks and capital markets.
There are, of course, many interesting and important areas in banking and financial
intermediation that are not directly related to the main focus of this survey but where
additional research is needed.^32 Some of these areas are mentioned here.
7.1. Banks as equity holders
An area where banks might expand their activities but traditionally have not been al-
lowed to, at least in the U.S., is in holding equity stakes. As opposed to Japan and
Germany, where banks are allowed to hold equity, banks in the U.S. are allowed to
hold equity only though restructuring bad loans (see e.g.James, 1995), or through some
provisions in venture capital (see e.g.Hellmann, Lindsey, and Puri (2006)).^33 As pre-
viously noted, there are efficiencies from underwriters holding equity in firms; venture
(^31) The results inDatta, Iskandar-Datta, and Patel (1999)are somewhat mixed. In another specification, they
find a significantlypositiverelationship between a banking relationship and the at-issue yield spread when
they only control for firm characteristics and if the bond has a call provision. The negative relationship arises
once the authors control for subordination and covenants.
(^32) For an excellent survey of many of the other areas in financial intermediation not covered here, seeGorton
and Winton (2002).
(^33) The advantages and disadvantages of allowing banks to hold equity have been analyzed in a number of
models (see e.g.Berlin, John, and Saunders, 1996; Stiglitz, 1985; Winton, 2003). Empirical work on bank