31 st March 2008Abstract: A central measure of the efficiency of the Initial Public Offering (IPO) market is the extent to which issues are underpriced. Legal, regulatory, disclosure and underwriting pressures have moulded the IPO market since World War II. This paper presents new and comprehensive evidence covering British IPOs since World War I. We find that during the period from 1917 to 1945, public offers were underpriced by an average of only 3.80%, as compared to 9.15 % in the period from 1946 to 1986 (when the UK stock market was deregulated). This substantial rise is robust to the inclusion of variables controlling for changes in firm risk and method of issue, and improvements in disclosure and the emergence of prestige underwriters.

Self-dealing in securities issuance can be characterized by an issuing manager who gains at the expense of the other existing stakeholders in the issue. The current system of public securities issuance for U.S. states potentially allows for conflict of interest through campaign contributions that benefit issuing officials. This paper shows that selecting a contributing underwriter through negotiation results in underpricing compared to a non-contributing underwriter. It also shows that an increase in the amount of campaign contributions by an underwriter results in an increase in the likelihood of selection. This result is mainly driven by lower-ranked underwriters. The pricing result is robust to endogeneity of the selection of a contributing underwriter. First-stage results of instrumental variable regression methods indicate that a large margin of victory for the political official is associated with a larger proportion of potentially conflicted deals. In addition, out of all the issues done through negotiation by underwriters who contributed, the issues that went to market in the year immediately after an election are the most underpriced. I would like to thank the members of my dissertation committee: Nejat Seyhun, Jim Hines, Serdar Dinc, Sreedhar Bharath, and Sugato Bhattacharyya for guidance and support. In addition, I am grateful to Tyler Shumway, Vikram

There has been substantial public and regulatory attention of late to apparent exploitation of conflicts of interest involving financial services firms based on financial market imperfections and asymmetric information. This paper proposes a workable taxonomy of conflicts of interest in financial services firms, and links it to the nature and scope of activities conducted by such firms, including possible compounding of interest-conflicts in multifunctional client relationships. It lays out the conditions that either encourage or constrain exploitation of conflicts of interest, focusing in particular on the role of information asymmetries and market discipline, including the shareholder-impact of litigation and regulatory initiatives. External regulation and market discipline are viewed as both complements and substitutes – market discipline can leverage the impact of external regulatory sanctions, while improving its granularity though detailed management initiatives applied under threat of market discipline. At the same time, market discipline may help obviate the need for some types of external control of conflict of interest exploitation. JEL G21, G24, G28, L14. Keywords: Conflicts of interest. Financial regulation. Financial services. Banking. Potential conflicts of interest are a fact of life in financial intermediation. Under perfect competition and in the absence of asymmetric information, exploitation of conflicts of interest cannot rationally take place. Consequently, the necessary and sufficient conditions for agency costs associated with conflict of interest exploitation center on market and information imperfections. Arguably, the bigger and broader the financial intermediaries, the greater the agency problems associated with conflict-ofinterest exploitation. It follows that efforts to address the issue through improved

IPO underpricing and after-market liquidity

In the wake of the dot.com collapse, investor sentiment toward initial public offerings (IPOs) has turned negative. To many investors, IPOs have come to symbolize the insider abuses and stock market excesses of the Internet bubble period; to others, investing in IPOs is inherently fraught with danger. This paper asks the question, Have IPOs indeed become more perilous to the investing public over time? I employ two approaches to investigate the post-issue riskiness of IPOs for the 1980-2000 period. First, I compare the stock price volatility for issuing and nonissuing firms. Second, I use a qualitative model to estimate the likelihood that new issues will survive in the aftermarket. Both methodologies show that the riskiness of IPO shares relative to the shares of a nonissuing peer group has increased roughly 30 percent in the 1990s. Although the proliferation of Internet companies in this period helps account for the increased risk, my empirical analysis reveals a more gradual shift in risk that cannot be fully explained by the high-tech bubble. Specifically, I find that companies taken public by toptier underwriters or funded by venture capital exhibit higher relative volatility and a lower likelihood of survival.

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments.

This brief survey discusses recent developments in the European initial public offering (IPO) market. The spectacular rise and fall of the Euro NM markets and the growth of bookbuilding as a procedure for pricing and allocating IPOs are two important patterns. Gross spreads are lower and less clustered than in the USA. Unlike the USA, some European IPOs, especially those in Germany, have when-issued trading prior to the final setting of the offer price. Current research includes empirical studies on the valuation of IPOs and both theoretical and empirical work on the determinants of short-run underpricing.

We develop a theoretical model founded on the idea that issuers and underwriters associate by mutual choice, an approach that contrasts with the conventional view in the literature of firms picking their underwriters. Underwriters look to the quality of the issuers who may wish to employ their services and issuers look to the abilities of the underwriters they consider employing. We derive several new results. First, our model predicts and our empirical tests confirm that the association of issuers and underwriters is transactional and that switching is bidirectional. Thus, whether firms switch or stay with the same underwriter for a secondary offering is determined by the relative change in quality of the firm and the relative change in reputation of the underwriter from IPO to SEO. After controlling for the change in underwriter reputation between IPO and SEO, we find that the change in the firm’s relative quality is highly significant in explaining the switch throughout our sample period. In particular, we find that issuers who experience a relative reduction in quality from IPO to SEO switch to lower reputation underwriters for SEO offerings. Second, while existing studies link underwriter market share to past performance, we derive new implications about underwriter market share based on current