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Strategic Pricing of Underwriting Service: Entrants Versus Incumbents

This paper documents that bank penetration in underwriting market is positively associated with the benefit of commercial bank underwriting, the presence of relationships with clients and firms with middle credit ratings, but negatively associated with issue size and issue maturity. Commercial banks provide discounts on fees to the clients they serve well, consistent with emphasis on gaining market share as entrants. However, they exploit some seemingly captured clients by charging them higher fees. Conversely, investment banks bargain for the underwriting benefits and charge higher fees when the benefits are positive. In responding to the competition of bank entry, incumbents charge a lower fee in the segments with higher bank penetration.