Lending Relationship and the Role of the Underwriter: Evidence from Italian IPOs
36 Pages Posted: 5 Mar 2015
Date Written: February 2015
This paper investigates whether and how the existence of a prior lending relationship with the IPO underwriting bank ameliorates or worsens information asymmetries, affecting the firm’s IPO and post-IPO performance in the Italian market. In particular, when the relationship between a firm and its lending bank extends to underwriting activities it can lead to two opposing effects: certification or conflict of interest. While evidence from the US shows a predominance of the certification role of underwriters, the findings from the Italian market are twofold. At first, results support a prominence of the certification hypothesis, as investors require a smaller underpricing for IPOs with lending relationships. However, in the long run, the conflict of interest effect prevails and stock performance shows a negative relationship with the lending relationship. The results question the ability of the Italian market to correctly evaluate IPOs.
Keywords: certification, conflict of interest, lending relationship
Suggested Citation: Suggested Citation