The role of lending-relationship banks in the underwriting of seasoned equity offerings: Conflict of interest or certification?

Abstract

Sections 20 and 32 of the 1933 Glass–Steagall Act address a potential conflict of interest by banning commercial banks from the market for corporate securities underwriting. This restriction was officially rescinded in 1999 by the Gramm–Leach–Bliley Financial Modernization Act. In turn, this development has piqued the interest of scholars and renewed the debate on the role that commercial banks play, as well as the consequences of this role in equity offerings, which may either result in conflict of interest or certification. In this study, we comprehensively examine whether conflict of interest or certification more accurately characterizes the underwriting of seasoned equity offerings (SEOs) by lending-relationship banks. Overall, the results suggest that the presence of lending-relationship banks lowers the gross spreads and underpricing of SEOs. Furthermore, our evidence shows that SEOs led by lending-relationship banks exhibit better long-run performance than other SEOs, which supports the certification hypothesis.