Conflicts of Interest and Efficient Contracting in Ipos

45 Pages Posted: 4 Nov 2008

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

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Date Written: September 2002

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. IPOsleads 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 ratesoptimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

Keywords: Initial public offerings, Underpricing, Intermediation, Integrated securities houses, Underwriting contracts

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander, Conflicts of Interest and Efficient Contracting in Ipos (September 2002). NYU Working Paper No. S-CG-02-07, Available at SSRN: https://ssrn.com/abstract=1295259

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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