Conflicts of Interest and Efficient Contracting in Ipos

49 Pages Posted: 12 Jan 2004

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

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Date Written: December 2003

Abstract

We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank's compensation more sensitive to the issuer's valuation should reduce agency conflicts and thus underpricing (Baron (1982); Biais, Bossaerts, and Rochet (2002)). Consistent with this prediction, we show that contracting on higher commissions in a large sample of UK IPOs completed between 1991-2002 leads to significantly lower initial returns, after controlling for other influences on underpricing and a variety of endogeneity concerns. These results indicate that issuing firms' contractual choices affect the pricing behaviour of their IPO underwriters. Moreover, we cannot reliably reject the hypothesis that the intensity of incentives is optimal, and so that contracts are efficient.

JEL Classification: G24, G32

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander, Conflicts of Interest and Efficient Contracting in Ipos (December 2003). CEPR Discussion Paper No. 4163, Available at SSRN: https://ssrn.com/abstract=487082

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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