COMMERCIAL-BANKS IN INVESTMENT BANKING - CONFLICT-OF-INTEREST OR CERTIFICATION ROLE

When commercial banks make loans to firms and also underwrite securiti es, does this hamper or enhance their role as certifiers of firm value ? This paper examines empirically the pricing of bank-underwritten sec urities as compared to investment-house-underwritten securities over a unique period in the U.S. (pre-Glass-Steagall) when both banks and in vestment houses were allowed to underwrite securities. The evidence sh ows that investors were willing to pay higher prices for securities un derwritten by banks rather than investment houses. The results support a certification role for banks, which is more valuable for junior and information sensitive securities.