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The article is a joint work of Thomas J Chemmanur and Paolo Fulghieri, it speaks about the reputation building of an investment bank, how information production and work of their underwriters help the banks build as well as break their reputation in the equity market. It calculates the reputation of a bank for entrepreneur and investor based on a virtual model created by them based on the real life market.

About the Authors:

The article is written by Thomas J Chemmanur and Paolo Fulghieri, this article was published by Blackwell Publishing for American Finance Association, in its "The Journal of Finance", Vol 149 No.1; Mar 94; Pg. 57-79.

Mr. Chemmanur is a professor of finance in Boston College in USA; with his research activities he has made a commendable contribution to the field of finance, which has also fetched him awards.

Mr. Fulghieri is a professor of finance at the Kenan Flagler Business School, he is PhD in Economics, 1987 from University of Pennsylvania. He has contributed a lot towards the field of finance through his research and study; also he has been awarded many times for his papers, articles and researches.


The work is not completely original; up to some extend it is an extension to the work of authors like Leland & Pyle (1977), Campbell & Kracaw (1980) and Kreps & Wilson (1982), etc.

Relevant examples and references are quoted wherever required to support their findings and suggestions, but authenticity and co-relation of these examples and references needs to be checked, whether they are on the same lines or not.

To make their research the authors have developed a virtual model based on the real market situations, and as prevailing in the market, there are 3 agents in the model,

1. Entrepreneur 2. Investment Banker 3. Investor

They have quoted that the investment banks charge high fees for their service and a lot has been written about the reputation of the investment bank, but the fact remains very clear that major responsibility of either overpricing or under pricing of the assets of entrepreneur depends upon the skills and work of the underwriter who assess the assets of the entrepreneur and does not solely depends upon the reputation or brand name of the bank. Also, that the high fees are charged because high cost is being incurred on the information gathering and setting evaluation standards. Moreover, their model just doesn't include firms dealing in IPO's but also includes firms dealing into seasonal equity issues, bond or debt market, etc.

Their research in this article has given the most importance to the underwriter and also that the fees of the bank just doesn't depends on banks reputation but also on underwriters reputation, and that underwriters fees also increases with their reputation.

At one point, they have related their model to product market also, where an e.g. of Allen (1984) & Shapiro (1983) is quoted. They say that, like fear of running reputation may prevent manufacturer of 'experience' goods (these are the goods whose quality can be known only after purchasing, because they lower the product quality in order to gain shore term profit). But unlike, manufacturer in product market, investment banker plays the role of 'mediator' or 'middleman' in the equity market, and therefore does not has all the information. Rather has only that information which the entrepreneur wishes them to have. Therefore they say that if the banker ones overprice or underprice the project that doesn't hamper the reputation of the bank much. They also, give a suggestion that to lessen the moral hazard feeling of being cheated in investors by investing a huge amount in the overpriced shares themselves; this may lessen the risk of spoiling the banks reputation.

The model of reputation acquisition by investment banks, have very well exhibited that reputation acquisition plays a critical role in enabling intermediaries to function as information producers. They have also laid down some formulas for calculating the reputation of the based on their model, which is not supported by any practical example of a real investment bank, which they should have done to make their article more realistic and applicable.

Therefore, it seems it may not be practically possible to calculate reputation of a bank based on formulas. Moreover, a firm going for public listing can afford to calculate the formula and derive the reputation, but a common investor who invests one to ten thousand GBP cannot afford to make calculation to calculate the reputation, that to of a middleman.

Therefore, if the authors would have developed a more realistic based reputation calculation method, it would have been more useful to the retail investors.



An article on similar grounds but different base as previous ones has been written by Prof. Manju Puri when doing her research from Stanford University. The article talks about the era before The Glass-Steagall Act was implemented in 1933, when the commercial banks were authorized to function as underwriter for corporate securities. She discusses and analyses that whether the commercial banks who finance the project, also underwriting corporate securities, whether it hampers the reputation of bank or not.

About the Author:

This article has been written by Manju Puri in "The Journal of Financial Economics" Vol 40, Issue March'96), Pg. 373-401. Manju Puri is a PhD in Finance from New York University, she started her career with HSBC and now working as a professor of finance and research fellow in Duke University. She has won many awards & honours & grants for her research and papers& book publication from Federal Deposit Insurance Corporation, etc. which suffice the authenticity if this article. She wrote this article when she was working with Graduate School of Business, Stanford University, Stanford.


Like previous article the author here also speaks about reputation of investment banks (hereafter referred as investment house), but in different perspective, i.e. she has compared investment houses reputation with commercial banks reputation. She has also projected the possible hazard when commercial banks who are into financing and providing commercial loans to entrepreneurs, when theses banks function as a investment house for the same entrepreneur, is this information biased? Her article discusses a different dimenstion about the reputation of investment bank.

Real life law and statutes are being explained and taken into consideration for proving her point, like The Glass-Steagall Act (1933). The pre Glass-Steagall Act period has been examined in this paper.

The commercial banks are prohibited from underwriting corporate securities in USA after The Glass-Steagall Act (1933), but in some countries like India no such act has been levied and commercial banks are still permitted to underwrite the corporate securities, so the validity of this paper is limited to some countries only.

This article tried to find answer for a very significant question, whether the evidence regarding conflicts of interest, support the concern of those opposed to The Glass-Steagall Act deregulation? And she has also managed to get the answer by analyzing the pricing of securities underwritten by commercial bank in pre Glass-Steagall period.

She says that to understand whether the conflicts of interest is reflected in the security price, and it is important to understand underwriters incentive in certifying security's value. The commercial bank while processing loans obtain personal and private information about the firm which is generally not known to the investors. Therefore, the commercial banks have more information than investment house even after incurring high-cost on information gathering and commercial bank certification have a stronger effect than that of investment house.

What commercial bank does is that they weigh the security strong when they finance the project so that from the proceeding the firm can pay back their loan, and protect their own self interest, at the expense of outside investors, and because investment house do not engage themselves in loan making they do not have such personal interest and tend to be more credible certifier.

She also quotes that investors should understand the pattern that, if the issue is rated lower that means the conflict of interest of the bank is stronger than investment house and if the bank issued higher rate than the conflict of interest is lower than that of investment hous.

For better understanding and clear presentation of information, the paper is divided into sub sections i.e.

Section 1: Sample Selection.

Section 2: Methods and Results.

Section 3. Examines Certification Effect.

Section 4: Conclusion.

Section 1: Sample Selection:

The data is collected on sample basis as listed below:

Data is collected pre Glass-Steagall period i.e. 01/01/1927 to 30/09/1929, this period is before the application of Glass-Steagall Act.

Data collected is measurable on front of size of issue, age of firm and the underlying security & credit ration associated with issue.

Section 2: Methods and Results:

All the tests done are well explained this section with their results, some of them is as listed below:

The basic null hypothesis test is used for results.

Univariate Test: the results are tabulated for better reading, understanding and analyzing.

Multivariated Test: the results are tabulated for better reading, understanding and analyzing.

Prohibit Tests.

Selectivity bias adjustments: the results are tabulated for better reading, understanding and analyzing.

Section 3. Examines Certification Effect:

Her findings from the tests showed that commercial banks underwriting has lower yields than investment house underwriting, to ensure that the incentives, that the banks get are driving the results she formulated additional tests, which showed that banks certification is highest when banks have access to more private information than investment house, accordingly she conducted some more tests on various kinds of issues and showed results in tabular format:

Foreign Government Bonds v/s Industrial Bonds (corporate bonds).

Industrial Bonds v/s Industrial Preferred Stocks.

New v/s Seasoned Offerings.

Non-investigating Grade Security v/s Investment Grade Security.

In House Bond Underwriting v/s Affiliate Underwriting.

Section 4: Conclusion:

The paper examines that there are two types of intermediaries for issue of equity, i.e. bank and investment house. The loan resources that bank have at risk, gives them access to private information at little cost, as compared to investment house, which may under produce information, because of high cost of production.

In general, the results drawn from this article confronts the hypothesis outline in Section 1 and 4. The test also supported the idea that investments perceived banks as being valuable certifiers of firms value.


After evaluating both the articles I conclude the following:

One reason why investment houses have to strive more to build reputation in equity market is that their underwriters have access to firm's limited information.

The investors believe that banks have more personal and private information of the firm and therefore find banks certification more reliable and this also hampers the repute of the investment house.

The reputation of investment house just does not depends up on their on past performance and evaluation standards but also depends on their competitors performance and evaluation standards.