The advantages and disadvantages of universal banking have long been debated. Using the successive granting of lead underwriter qualifications to commercial banks in China as a quasi-natural experiment, we study the impact of universal banking on non-financial firms’ investment decisions. We find that after a firm’s main lending banks qualify as lead underwriters, the firm’s investment increases by 7.7 to 8.3 percent on a gross or net basis. The underlying mechanism is that universal banking can generate informational economies of scope and relax constraints on the provision of external finance. In contrast, we find no evidence on the conflict of interest between universal banks and their customers. Our study, therefore, sheds light on the potential gains from universal banking.

Using samples of corporate bonds issued by Chinese A-share firms from 2007 to 2019, we examine how the type of local bond underwriting firm, specifically, whether the local underwriter has foreign shareholders or does not have foreign shareholders, affects the number of bond covenants. Our findings suggest that local underwriters with foreign shareholders (UFS) add more covenants to their bonds to protect the interests of bondholders than local underwriters without foreign shareholders (UNFS). Thus, having UFS underwrite bonds in an emerging market generally helps investor protection. Our conclusion remains robust to alternative metrics of bond covenants and foreign shareholders, and after accounting for endogeneity. Additional analyses suggest that the effect of UFS on bond covenants is more salient when: 1) the issuer is opaque, has a dual board chair and CEO, or is a non-state owned firm, 2) the issuer is located in a poor legal environment, in a low marketization area, or a region with poor economic development, or 3) the foreign shareholder of the local underwriter has experience in its home market, is from a country with a better legal environment, or has ample experience in the Chinese underwriting business.