Premium
Integration of Lending and Underwriting: Implications of Scope Economies
Author(s) -
Kanatas George,
Qi Jianping
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00562
Subject(s) - underwriting , investment banking , scope (computer science) , business , intermediary , economies of scope , incentive , investment (military) , financial intermediary , market segmentation , market power , financial services , finance , industrial organization , financial system , commerce , economics , market economy , economies of scale , marketing , politics , computer science , political science , law , monopoly , programming language
Informational scope economies provide a cost advantage to universal banks offering “one‐stop shopping” for lending and underwriting that enables them to “lock in” their clients' subsequent business. This market power reduces universal banks' incentive, relative to that of specialized investment banks, to apply costly underwriting efforts; consequently, universal banks are less successful in selling their clients' securities. Our results suggest that an integrated financial services market is less innovative than one with specialized intermediaries. Our analysis also identifies economy, intermediary, and firm characteristics that motivate either the integration or segmentation of bank lending and underwriting.