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Conflicts of interest and efficient contracting in IPOs

Authors: Ljungqvist, Alexander
Keywords: Initial public offerings;Underpricing;Intermediation;Integrated securities houses;Underwriting contracts
Issue Date: 20-Sep-2002
Series/Report no.: FIN-02-026
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. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOs leads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission rates optimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.
Appears in Collections:Finance Working Papers

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