Philippine commercial banks in investment banking: Conflict of interest or certification role?

Date of Publication

2006

Document Type

Bachelor's Thesis

Degree Name

Bachelor of Science in Commerce Major in Management of Financial Institutions

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Lago, Joseph James F.

Defense Panel Chair

Zalameda, Milkos Patrick B.

Defense Panel Member

Lim, Steven S.
Coligado, Jan-Michael G.

Abstract/Summary

Commercial bank entry into securities underwriting can affect underwriter behavior because, unlike investment houses, banks also lend to firms. This raises several issues. One argument is the incentive that the bank would otherwise have to underwrite securities for its poorer quality borrowers and use the proceeds to pay down these loans. This conflict of interest is believed to arise from the informational role of financial intermediaries. On the other hand, if banks use its information advantage to certify the true value of firms, banks are deemed to perform their certification role. Investment houses do not have the same conflict of interest since they do not engage in loan-making activities and hence, they are considered credible certifiers of firm value.

The main purpose of this study is to determine whether the investment banking activity enhances commercial banks' certification role or reduces conflict of interest. As part of the objectives, the study also examined if there are differences in (net) certification effects between investment grade and non-investment grade issues, and secured and unsecured issues.

The study focuses on corporate debt securities particulalry bonds and long term commercial papers (LTCPs). The yield, which is the dependent variable, of bank and investment house underwritings is used to assess the hypotheses. Factors that affect the yield are amount of issue, investment grade, number of underwriters, being listed in an exchange, undelying collateral, age of issuing firm, type of issue, and the presence of banks as the underwriter. The study also included interviews with the investment banking practitioners whcih provide insights on the realities of invetsment banking in the Philippines. Univariate tests and regression analysis are used to analyze the data gathered from different sources.

Based on the results, certification role of banks in investment banking is evident as shown by the reduction in yield of bank underwritings. However, the information advantage is not utilized by banks in underwriting securities. The reduction in yield is attributed to one significant fact which is the amount of the isue that is evident on the majority of bank underwiritings. Furthermore, banks' certification effect has more advantage for unsecured rather than secured issues but has no difference between investment grade and noninvestment-grade issues.

Abstract Format

html

Language

English

Format

Print

Accession Number

TU21827

Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

70, [20] leaves

Keywords

Banks and banking--Philippines

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