| This dissertation investigates the economic impact of repealing Glass-Steagall Act of 1933 on financial industry. The Act prohibits commercial banks from security underwritings. In 1987, commercial banks are allowed to engage in underwriting and dealing certain securities on a limited basis. The first essay examines three questions regarding commercial banks' involvement in the security underwriting business in the post-section 20 era: (i) how does the ten percent revenue limitation distort the underwriting activities of commercial banks? (ii) how different commercial banks are from investment banks under the regulatory and market conditions? and (iii) which types of issuing firms do receive benefits from the bank-entry? We find evidence consistent with the regulatory distortion explanation that commercial banks are actively engaging in small issue market. Compared to investment banks, commercial banks do not possess better ability in underwriting for small issuers. In fact, they are better in serving large clients but they can not handle large issue size. Commercial banks have better informational advantage. The association with commercial banks provides value to issuing firms. However, the evidence supports that the market is concerned for conflicts of interest and informational monopoly power of commercial banks. Due to the pros and cons of commercial banks, only issuers with middle credit ratings receive significant benefits from bank entry. Whereas, small issuers with high credit ratings and large issuers with low credit ratings are suffered from the banks' expansion at the later entry stage. In the second essay, we examine empirically the economic rationales of coalitions of underwriters and the role of commercial banks as co-managers, when they expand into the security underwriting business. We find evidence that commercial banks strategically select their mode of entry, either by leading the syndicates or by participating in syndicates led by an investment bank (the hybrid form), depending on their underwriting strength in different markets. By cooperating with a reputable investment bank, commercial banks can effectively reduce their conflicts of interest problem while preserving their informational advantages. The creation of a better organizational form in conducting security underwriting provides economic incentives for investment banks to accommodate the entry of commercial banks. The distinct functions offered by commercial banks facilitate their penetration into the security underwriting industry. In most cases, the hybrid structure is superior to both the commercial bank lead syndicate and to the pure investment bank arrangement. This paper highlights shortcomings of previous work in this area that focus only on issues that are commercial bank lead. By neglecting other organizational forms, such as hybrid syndicates, previous research understates the benefits that commercial banks bring into the security underwriting business. |
