Bank Entry Competition, Group Reputation, and Underwriting Incentive

This paper studies how competition lowers underwriters' incentive to screen clients in the bond market during 1996-2000. Responding to the intensified competition due to commercial bank entry, underwriters appeared to co-lead (work in groups) in lower quality deals but maintained their individual reputations by sole-leading higher quality deals. The findings imply that reputation matters in bond underwriting and, ex ante, underwriters knew more about their clients' quality than did investors. The evidence suggests that underwriters played a role in financial scandals during the Internet bubble period. Although underwriters may not initiate these scandals, they did not curtail those lemon clients, either