Valuation Uncertainty and Ipo'S: Investment Bank Versus Commercial Bank Underwriters

Saint Mary's University Working Paper

34 Pages Posted: 26 Dec 2000

See all articles by Gregory Hebb

Gregory Hebb

Dalhousie University - School of Business Administration

Greg H. MacKinnon

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science

Date Written: December 2000

Abstract

This paper examines the microstructure trading characteristics of initial public offerings underwritten by commercial banks. The degree of asymmetric information present in the market for these issues is measured by the price impact of trades and the size of the bid-ask spread. If there is more uncertainty in the market about the value of issues underwritten by commercial banks, than these securities should exhibit a greater degree of asymmetric information in their trading environment than non-commercial bank underwritten initial public offerings. More uncertainty could be due to a perceived conflict of interest when commercial banks underwrite securities. Conversely, if the market believes that commercial bank involvement signals firm quality and provides additional information to the public, less asymmetric information will be present in the market. This topic has recently gained in importance with the passage of the Financial Services Reform Act in November 1999 and the inevitable move towards universal banking. We find that, when characteristics of the IPO are controlled for, trades in commercial bank underwritten issues exhibit significantly higher price impacts. This is consistent with greater uncertainty about the value of commercial bank underwritten IPO's and also consistent with the market perceiving a possible conflict of interest on the part of commercial banks.

Keywords: Commercial banks, conflict of interest, initial public offerings, underwriters, bid-ask spread

JEL Classification: G21, G24

Suggested Citation

Hebb, Gregory M. and MacKinnon, Greg H., Valuation Uncertainty and Ipo'S: Investment Bank Versus Commercial Bank Underwriters (December 2000). Saint Mary's University Working Paper, Available at SSRN: https://ssrn.com/abstract=254277 or http://dx.doi.org/10.2139/ssrn.254277

Gregory M. Hebb

Dalhousie University - School of Business Administration ( email )

Halifax, Nova Scotia B3H 4R2
Canada

Greg H. MacKinnon (Contact Author)

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science ( email )

Halifax, Nova Scotia B3H 3C3 B3H 3C3
Canada
902-420-5730 (Phone)
902-496-8101 (Fax)

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