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Conflicts of Interest and Efficient Contracting in IPOs

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  • Ljungqvist, Alexander

Abstract

We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank?s compensation more sensitive to the issuer?s valuation should reduce agency conflicts and thus underpricing (Baron (1982); Biais, Bossaerts, and Rochet (2002)). Consistent with this prediction, we show that contracting on higher commissions in a large sample of UK IPOs completed between 1991-2002 leads to significantly lower initial returns, after controlling for other influences on underpricing and a variety of endogeneity concerns. These results indicate that issuing firms? contractual choices affect the pricing behaviour of their IPO underwriters. Moreover, we cannot reliably reject the hypothesis that the intensity of incentives is optimal, and so that contracts are efficient.

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  • Ljungqvist, Alexander, 2003. "Conflicts of Interest and Efficient Contracting in IPOs," CEPR Discussion Papers 4163, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4163
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    2. Baridhi Malakar, 2024. "Fiduciary Duty in the Municipal Bonds Market," Papers 2406.15197, arXiv.org.
    3. David Chambers, 2006. "Gentlemanly capitalism revisited: a case study of the underpricing of Initial Public Offerings on the London Stock Exchange, 1946-86," Working Papers 6016, Economic History Society.
    4. Brown, Craig O., 2017. "The politics of government financial management: Evidence from state bonds," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 158-175.
    5. Trauten, Andreas, 2004. "Zur Effizienz von Wertpapieremissionen über Internetplattformen," Working Papers 8, University of Münster, Competence Center Internet Economy and Hybrid Systems, European Research Center for Information Systems (ERCIS).
    6. Jay R. Ritter, 2003. "Differences between European and American IPO Markets," European Financial Management, European Financial Management Association, vol. 9(4), pages 421-434, December.

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    More about this item

    Keywords

    Initial public offerings; Underpricing; Intermediation; Integrated securities houses; Underwriting contracts;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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