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The Role of Financial Intermediaries in Securities Issues: A Theoretical Analysis

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Author Info
Adriani, Fabrizio
Deidda, Luca
Sonderegger, Silvia

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Abstract

We consider a model of securities issues where the quality of securities is private information to the issuer, and firms of higher quality are more reluctant to issue securities than low quality firms. We show that, when the issuer directly trades with investors, market breakdown may occur. This is caused by the issuer's attempts to signal his type through the offering price. Things change if we introduce a financial intermediary which: i) underwrites the issue, ii) influences the offering price.Underwriting creates a wedge between the interests of the intermediary and those of the issuer, which allows trade with investors to be restored. A by-product of this conflict of interest is that trade is characterized by underpricing. Another implication is that the intermediary may act as a reliable screening device when she possesses private information about the firm's quality. In general, our analysis suggests that collusion between the intermediary and the issuer hinders trade, whereas collusion between the intermediary and investors may promote it.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16112.

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Date of creation: Mar 2009
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Handle: RePEc:pra:mprapa:16112

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Related research
Keywords: Signaling; Financial Intermediaries; Securities Issues; Underwriting.;

Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

This paper has been announced in the following NEP Reports:

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