Investment banks as corporate monitors in the early twentieth century United States

Carola Frydman, Eric Hilt

Research output: Contribution to journalReview articlepeer-review

12 Scopus citations


We study the effect of fnancial relationships on frms' investment decisions and access to external fnance. In the early twentieth century, securities underwriters commonly held directorships with American corporations. Section 10 of the Clayton Antitrust Act prohibited bankers from serving on the boards of railroads for which they underwrote securities. We fnd that following the implementation of Section 10, railroads with strong preexisting relationships with underwriters saw declines in their investment rates, valuations, and leverage, and increases in their costs of external funds. Reassuringly, we do not observe similar effects among industrials and utilities, which were not subject to Section 10. Our results are consistent with underwriters on corporate boards acting as delegated monitors, and highlight the potential for regulations intended to address conflicts of interest to disrupt valuable information flows.

Original languageEnglish (US)
Pages (from-to)1938-1970
Number of pages33
JournalAmerican Economic Review
Issue number7
StatePublished - Jul 2017

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Investment banks as corporate monitors in the early twentieth century United States'. Together they form a unique fingerprint.

Cite this