Competition and the Structure of Vertical Relationships in Capital Markets

We show that information flows between investment banks and their clients affect relationships and that shocks to these flows affect corporate investment. Firms avoid sharing investment banks in their industry, but only when they engage in product market competition. This suggests that concerns about disclosure of confidential information to strategic rivals determine firms' investment bank choices. Using exogenous shocks to information flows arising from bank mergers, we show that the desire to avoid sharing banks has a substantial effect on investment. These information effects help us understand how the investment banking industry is structured, how banks compete, and how prices are set.