Sedimentación

Coverage Clients

Finally, we conduct a pooled cross-sectional analysis of (0,+1) CARs earned by all firms that received equity underwriting, debt underwriting, M&A advising,

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NYSE market making, or analyst coverage services from Lehman. This analysis is presented in Table XIX. For each client group, we include a dummy variable that takes the value of one if the client received that specific service from Lehman and zero otherwise. We also include as independent variables firm-specific characteristics (size, age, and Z-score), dummies for whether Lehman was a lead or participant lender, and ownership of the firm’s shares by Lehman Brothers Holdings Inc and Neuberger Berman LLC. Event study analyses suggest that equity underwriting is the principal source of value for clients in investment banking relationships. Our aim is to re-examine that conclusion in a multivariate analysis that disentangles the marginal effects of each type of client-bank relationship. If our conclusion is robust, we would expect to observe a negative and significant coefficient for equity underwriting, and this is exactly what we find. The coefficient on the dummy variable that equals one if the firm received equity underwriting services from Lehman and zero otherwise is negative and significant at the 1% level in specifications (1) and (2). The interpretation is that clients that received equity underwriting services reacted more negatively than clients that did not receive equity underwriting services, on average. In specifications (5) through (7), we use the natural logarithm of one plus the number of equity offerings underwritten by Lehman in lieu of a dummy and reach the same conclusion. In contrast, the coefficients on the dummies that correspond to receipt of straight debt underwriting and convertible debt underwriting are statistically insignificant in specifications (1)

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and (2) as are the coefficients on the natural logarithms of one plus the number of straight debt offerings and one plus the number of convertible debt offerings.

**** Insert Table XIX about here ****

The dummy for receipt of NYSE specialist service is also insignificant in all specifications. The analyst coverage dummy is positive and significant at the 10% level or better in two of seven specifications, indicating that firms that received analyst coverage were less adversely affected by the collapse of Lehman than the average client not receiving analyst coverage. The dummy for receipt of M&A advisory services is positive and statistically significant in specifications (1) and (2), as is the natural log of one plus the number of M&A deals advised by Lehman in specifications (5) through (7). While this finding suggests that Lehman M&A clients fared relatively better than the average Lehman client that did not receive M&A advisory services, it should not be construed as evidence of a positive reaction by M&A clients to the Lehman collapse. Indeed, the event study results reported in Panel C of Table XIII show an insignificant reaction by the 87 Lehman M&A clients to the collapse. As in Table XII, we find evidence that clients that used Lehman for multiple underwriting services (equity, debt and convertible debt) were especially adversely affected. The underwriting relationship scope index is negative in all three specifications in which it is included although statistically significant in only two of them. These results buttress our conclusion that equity underwriting is the principal source of value for clients in investment banking relationships.

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V. Conclusions

The unexpected collapse of Lehman Brothers provides a unique natural experiment to find answers to two key questions in the corporate finance and banking literatures: (1) Are investment banking relationships valuable for client firms and, if so, (2) what are the value drivers of these relationships? We examine the impact of Lehman Brothers’ bankruptcy on different categories of the bank’s publicly traded clients by studying how their stock prices reacted to the collapse. We find that companies that used Lehman as lead underwriter for one or more equity offerings during the 10 years leading up to September 2008 suffered economically and statistically significant negative abnormal returns when Lehman Brothers declared bankruptcy. Based on Fama-French-Carhart four-factor model adjusted abnormal returns, the 184 equity underwriting clients that we study lose 4.85% of their market value, on average, over a seven-day period spanning the five trading days prior to and the first and second trading days immediately following Lehman’s bankruptcy, amounting to approximately $23 billion in aggregate, risk-adjusted losses. These losses were significantly larger than for firms that were equity underwriting clients of other large investment banks, and were especially severe for companies that were smaller, younger, more financially constrained, and had undertaken a larger number of Lehman-led equity offerings or equity offerings in conjunction with debt offerings. No other client groups were significantly adversely affected by Lehman’s collapse. These results show that Lehman’s collapse did, in

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fact, impose material losses on its customers, but for the most part these losses were confined to those companies which employed Lehman for equity underwriting.

Our findings also provide insights into the “too-big-to-fail” (TBTF) rationale for the government rescue of financial institutions. While TBTF has traditionally been used as a justification for the government rescue of commercial banks due to the systemic risk that their failure would pose to the banking system, the TBTF rationale was extended to nonbanks when the U.S. Federal Reserve orchestrated the 1998 rescue of Long-Term Capital Management, whose failure threatened the financial markets. While the significant adverse effect of Lehman’s bankruptcy on the financial markets in general and Lehman’s financial counterparties in particular may have led the government to change its strategy toward allowing other large nonbank financial institutions (such as AIG) to fail (Financial Crisis Inquiry Commission, 2010), our findings shine the spotlight on another negative consequence of Lehman’s collapse that has been ignored hitherto.

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