Prevention is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition

Posted: 29 Aug 2012

See all articles by Yoram Barzel

Yoram Barzel

University of Washington

Michel A. Habib

University of Zurich; Swiss Finance Institute

D. Bruce Johnsen

George Mason University - School of Law; PERC - Property and Environment Research Center

Date Written: November 1, 2006

Abstract

We treat information acquisition by potential investors in initial public offerings as endogenous. With endogenous information, the critical question is why underwriters would allow investors to spend resources acquiring superior information intended solely to effect a wealth transfer. We show that an investment banking syndicate is an institutional arrangement designed to avoid such a transfer. By inviting rival banks to share in the offering, a managing underwriter ensures they have a strong incentive to remain ignorant. We characterize the resulting outcome as one of symmetric ignorance. The desire to maintain symmetric ignorance is consistent with the observed passivity of nonmanaging syndicate participants.

Suggested Citation

Barzel, Yoram and Habib, Michel A. and Johnsen, D. Bruce, Prevention is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition (November 1, 2006). Journal of Business, Vol. 79, No. 6, 2006, Available at SSRN: https://ssrn.com/abstract=2138372

Yoram Barzel

University of Washington ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-2510 (Phone)
206-685-7477 (Fax)

Michel A. Habib (Contact Author)

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
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41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

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CH-1211 Geneva 4
Switzerland

D. Bruce Johnsen

George Mason University - School of Law ( email )

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United States
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703-993-8088 (Fax)

PERC - Property and Environment Research Center

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United States

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