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Conflict of Interest in Universal Banking: Evidence from the Post-­Issue Performance of IPO Firms

Author

Listed:
  • Hedva Ber

    () (Bank of Israel)

  • Yishay Yafeh

    () (The Hebrew University of Jerusalem)

  • Oved Yosha

    (Tel ­Aviv University)

Abstract

Using a unique newly constructed data set 011 Israeli IPO firms in the 1990's, we study costs and benefits of universal banking. The post-­issue accounting profitability of firms underwritten by bank affiliated underwriters that were also borrowers from the same bank in the IPO year, is significantly better than average. This is interpreted as evidence that universal banks use their superior information regarding underwritten firms to float the cherries, not the lemons. We also find, however, that the stock price performance of these firms during the first year following the IPO is lower than average. Furthermore, among these firms, the stock price performance of firms whose equity was purchased by an investment fund that is affiliated with the underwriting and lending bank is even lower. We also compute first day returns for the IPO stocks. The first year underperformance is interpreted as IPO overpricing, which is consistent with the 'first day returns. Thus, bank managed funds pay too much for bank underwritten IPOs at the expense of the investors in the funds. We conclude that there is conflict of interest in the combination of bank lending, underwriting, and fund management. Although universal banks use their superior information regarding underwritten firms to float the cherries, investors in bank managed funds end up paying too much for the equity of these firms.

Suggested Citation

  • Hedva Ber & Yishay Yafeh & Oved Yosha, 1997. "Conflict of Interest in Universal Banking: Evidence from the Post-­Issue Performance of IPO Firms," Bank of Israel Working Papers 1997.05, Bank of Israel.
  • Handle: RePEc:boi:wpaper:1997.05
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    File Function: First version, 1997
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    References listed on IDEAS

    as
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    Cited by:

    1. Asher Blass & Yishay Yafeh, 1998. "Vagabond Shoes Longing to Stray ­Why Israeli Firms List in New York Causes and Implications," Bank of Israel Working Papers 1998.02, Bank of Israel.

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