Conflict of Interest in Universal Banking Evidence from Brazilian IPOs

Abstract

We investigate conflict of interest in universal banking through IPO short run-returns. Two of the main obstacles to detect mispricing in IPOs are the price stabilization performed by the underwriter that can distort secondary market prices and the absence of data on the ex-ante demand for the offering. In this article we take advantage of a Brazilian institutional feature that forces the underwriter to disclosure information on the price stabilization process and on the ex-ante demand for the offering. We found no evidence for mispricing for the cases in which the underwriter lends money to a firm and later on underwrites its IPOs. Things are different when the underwriter buys equity: for the stabilization period, there is no evidence of mispricing. However, for the post-stabilization period, there is evidence. Returns for equity-conflicted IPOs in the post stabilization are 8-9% lower than for non-conflicted ones. Evidence suggests that underwriters use price stabilization to disguise such overpricing. This has policy implication because it shows that universal banks can behave opportunistically and harm investors when there is opportunity for it.

Keywords: Universal Banking, conflicts of interest, investment banks

JEL Classification: G1, G21, G24