The Value of Investment Banking Relationships: Evidence from the Collapse of Lehman Brothers

The sudden collapse of Lehman Brothers on September 14, 2008 offers a unique natural experiment to test whether existing investment banking relationships have value for the clients. We study the impact of the Lehman collapse on industrial firms that employed Lehman for (1) underwriting equity offerings; (2) underwriting debt offerings; (3) providing advice on mergers and acquisitions; (4) providing analyst research services; and (5) providing market-making services. Companies using Lehman as lead underwriter for equity offerings lost around 5 % of their market value, on average, (amounting to approximately $23 billion in lost market capitalization) in the seven days surrounding Lehman’s bankruptcy. We also examine how client losses were related to various client characteristics including the nature and strength of their relationship with Lehman. The losses were especially severe for companies that had undertaken a larger number of equity offerings in the past 10 years with Lehman as lead underwriter and those that were smaller, younger, and more financially constrained. No other client groups were adversely affected. Our findings offer new insights into how investment banking relationships create value for clients, including the variation across the different services offered b