1 Do Investment Banks Matter? The Impact of the Near Loss of an Equity Underwriter

The financial crisis provides a natural experiment to understand investment banks’ underwriting function. On the day of their equity underwriter’s near failure, stock prices of clients of Bear Stearns, Lehman, Merrill and Wachovia fell by more than 5%, on average. This decline was more than 1 % lower than the conditional return predicted by a market model, a destruction of equity value of more than $3 billion. The price impact was worse for companies with more opaque operations and fewer monitors, suggesting that underwriters play an important role in monitoring newly public companies. I find no evidence that the abnormal price decrease was related to underwriters ’ role as market maker or lender