The Failure of Drexel Burnham Lambert : Evidence on the Implications for Commercial Banks

We argue that since bank loans and publicly traded sub- investment-grade debt, or junk bonds, are close substitutes for one another, the recent failure of Drexel Burnham Lambert created a competitive opportunity for commercial banks. Consistent with this hypothesis, we observe within the commercial banking industry a positive wealth effect associated with Drexel's failure. The distribution of the wealth effect across commercial banks and Drexel's investment banking rivals is consistent with the wealth effect being primarily a reflection of market expectations of a return to traditional intermediated funding of sub- investment-grade debt