Conflict of Interest in Universal Banking and Price Stabilization in IPOs
31 Pages Posted: 10 Jun 2014
Date Written: June 9, 2014
We investigate the effect of conflict of interest in universal banking on the price stabilization in IPOs and their short-term returns. We find that loan-based conflict increases the probability of the issue being stabilized but not on the intensity of the stabilization. We do not find evidence that loan based conflict do not bear consequences on pricing. Equity-based conflict increases the probability of the issue being fully overalloted and being stabilized, and increases the intensity of the stabilization. Equity-conflicted IPOs do not underperform non-stabilized ones during the stabilization period. For the post-stabilization period, returns on equity-conflicted IPOs are 8-9% lower than on 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. We also contribute to the price stabilization literature by showing that the three decisions involved in price stabilization (overallotment, repurchase of share and intensity of repurchase) has distinct determinants.
Keywords: Universal Banking, conflict of interest, IPO, price stabilization, aftermarket short covering
JEL Classification: G24
Suggested Citation: Suggested Citation