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Conflict of Interest in Universal Banking and Price Stabilization in IPOs

31 Pages Posted: 10 Jun 2014  

Antonio Gledson De Carvalho

Fundacao Getulio Vargas School of Business at Sao Paulo

Joao Amaro de Matos

Nova School of Business and Economics

Douglas Beserra Pinheiro Sr.

KOIN

Date Written: June 9, 2014

Abstract

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

De Carvalho, Antonio Gledson and Amaro de Matos, Joao and Pinheiro, Douglas Beserra, Conflict of Interest in Universal Banking and Price Stabilization in IPOs (June 9, 2014). Available at SSRN: https://ssrn.com/abstract=2447903 or http://dx.doi.org/10.2139/ssrn.2447903

Antonio Gledson De Carvalho (Contact Author)

Fundacao Getulio Vargas School of Business at Sao Paulo ( email )

R. Itapeva, 474 - 7o. andar
Sao Paulo 01313-902
Brazil
+5511 3281-7767 (Phone)

Joao Amaro de Matos

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-038
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~amatos

Douglas Pinheiro

KOIN ( email )

Sao Paolo
Brazil

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