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The IPO Spread and Conflicts of Interests

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Author Info
Naoki KOJIMA ()
Abstract

The level of the IPO spread taken by the underwriter is a controversial issue.Some claim that the level is too high and attributes it to collusion between investment banks while others contend to the contrary. The paper examines the spread in the framework of conflicts of interests between the issuer, the underwriter and the informed investor. The argument is developed, based upon incentives for the underwriter. It is shown that the issuer should have the spread large enough for the underwriter to stay faithful to the issuer.

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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 04-06.

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Length: 25 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:bru:bruedp:04-06

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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  2. Hansen, Robert S., 2001. "Do investment banks compete in IPOs?: the advent of the "7% plus contract"," Journal of Financial Economics, Elsevier, vol. 59(3), pages 313-346, March. [Downloadable!] (restricted)
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  6. Gande, Amar & Puri, Manju & Saunders, Anthony, 1999. "Bank entry, competition, and the market for corporate securities underwriting," Journal of Financial Economics, Elsevier, vol. 54(2), pages 165-195, October. [Downloadable!] (restricted)
  7. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, 06. [Downloadable!] (restricted)
  8. Barry, Christopher B. & Muscarella, Chris J. & Vetsuypens, Michael R., 1991. "Underwriter warrants, underwriter compensation, and the costs of going public," Journal of Financial Economics, Elsevier, vol. 29(1), pages 113-135, March. [Downloadable!] (restricted)
  9. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January. [Downloadable!] (restricted)
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  10. Francesca Cornelli, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December. [Downloadable!] (restricted)
  11. Biais, Bruno & Bossaerts, Peter & Rochet, Jean-Charles, 2002. "An Optimal IPO Mechanism," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 117-46, January.
    Other versions:
  12. Ber, Hedva & Yafeh, Yishay & Yosha, Oved, 2001. "Conflict of interest in universal banking: Bank lending, stock underwriting, and fund management," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 189-218, February. [Downloadable!] (restricted)
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