Relationship Banking and the Pricing of Financial Services, Cambridge MA: National Bureau for Economic Research

We investigate how banking relationships affect the terms of lending, through both supply- and demand-side effects, and the underwriting costs of debt and equity issues. We use micro-level loan and underwriting data to investigate pricing effects of the joint production of loans and security underwritings within the context of relationship banking. We capture and control for firm characteristics, including differences in the sequences of firm financing decisions, and assemble a database of the financial histories of 7,315 firms, comprising their loans, debt issues, and equity issues for the period 1992 to 2002. We address several shortcomings in prior studies, which results in significant improvement in the explanatory power of our regressions when compared to prior studies. We find no evidence that universal banks under-price loans to win underwriting business, which also rules out any possibility of illegal “tying. ” We do find evidence that banks price loans and underwriting services in a strategic way to extract value from their relationships. In particular, we find that banks charge premiums for both loans and underwriting services to extract value from their combined lending and underwritin