Financial Conglomeration, IPO Underwriting, and Allocation in Japan

Abstract

We examine whether financial conglomeration enhances efficiency of capital allocation or conflicts of interest, focusing on pricing and allocation of IPO stocks in Japan. Regarding underwriting of IPO stocks, our results are consistent with the bank certification hypothesis. As for IPO allocation, the main bank underwriters allocate little to mutual funds, but when they do, they allocate the more underpriced IPOs to unaffiliated mutual funds. We also find some locally consistent evidence supporting the nepotism hypothesis in aftermarket returns of IPO shares. Bank-involved allocation to mutual funds is, however, unrelated to risk-adjusted return (i.e., real quality) and to bank loan reduction in the aftermarket. Overall, the main banks and underwriters do not co-work to allocate new shares in a way that further certifies IPO quality, prompting institutional investors to hold longer in the aftermarket. This is in sharp contrast to U.S. IPO share allocation practice.

Keywords: Financial Conglomerates, IPO, Underwriting, Mutual Funds

JEL Classification: G14, G24, G38