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Conflict of Interest in Commercial Bank Equity Underwriting

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  • Gregory M. Hebb

Abstract

This paper examines the pricing characteristics of initial public offerings underwritten by commercial banks. Assuming IPO underpricing is directly related to ex ante uncertainty, if the market rationally perceives these commercial banks to have a conflict of interest, these securities should have more underpricing than non‐commercial bank underwritten initial public offerings (all else being equal). On the other hand, if the market believes that commercial bank involvement signals firm quality, less underpricing should be observed. This topic has recently gained in importance with the passage of the Financial Services Reform Act in November 1999. We find that the underpricing of commercial bank underwritten initial public offerings in which the firm had a previous banking relationship with the underwriter is significantly less than those underwritten by investment banks.

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  • Gregory M. Hebb, 2002. "Conflict of Interest in Commercial Bank Equity Underwriting," The Financial Review, Eastern Finance Association, vol. 37(2), pages 185-205, May.
    • Handle: RePEc:bla:finrev:v:37:y:2002:i:2:p:185-205
    DOI: 10.1111/1540-6288.00011
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    Cited by:

    1. David P. Ely & Kenneth J. Robinson, 2004. "The impact of banks' expanded securities powers on small‐business lending," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 79-102.
    2. Fields, L. Paige & Fraser, Donald R., 2004. "Effects of IPO mispricing on the risk and reputational capital of commercial banks," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 65-77.
    3. Saif-Alyousfi, Abdulazeez Y.H. & Saha, Asish & Alshammari, Turki Rashed, 2023. "Bank diversification and ESG activities: A global perspective," Economic Systems, Elsevier, vol. 47(3).
    4. Lee, Chin-Chong & Poon, Wai-Ching, 2018. "Wealth transfers in rights offerings and the protective instruments," Journal of Contemporary Accounting and Economics, Elsevier, vol. 14(3), pages 335-357.
    5. Chen, Hsuan-Chi & Chou, De-Wai & Lai, Christine W. & Yeh, Yi-Ting, 2014. "The role of lending-relationship banks in the underwriting of seasoned equity offerings: Conflict of interest or certification?," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 327-346.
    6. Wolfgang Bessler & Andreas Kurth, 2007. "Agency Problems and the Performance of Venture-backed IPOs in Germany: Exit Strategies, Lock-up Periods, and Bank Ownership," The European Journal of Finance, Taylor & Francis Journals, vol. 13(1), pages 29-63.
    7. L.Paige Fields & Donald R. Fraser, 2004. "Effects of IPO mispricing on the risk and reputational capital of commercial banks," Review of Financial Economics, John Wiley & Sons, vol. 13(1-2), pages 65-77.
    8. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2021. "Non-pricing drivers of underwriters’ market shares in corporate bond markets," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 671-693.

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