Conflict of Interest in Universal Banking: Evidence from the Post-­Issue Performance of IPO Firms

Hedva Ber (), Yishay Yafeh () and Oved Yosha
Additional contact information
Hedva Ber: Bank of Israel
Yishay Yafeh: The Hebrew University of Jerusalem
Oved Yosha: Tel ­Aviv University

No 1997.05, Bank of Israel Working Papers from Bank of Israel

Abstract: Using a unique newly constructed data set 011 Israeli IPO firms in the 1990's, we study costs and benefits of universal banking. The post-­issue accounting profitability of firms underwritten by bank affiliated underwriters that were also borrowers from the same bank in the IPO year, is significantly better than average. This is interpreted as evidence that universal banks use their superior information regarding underwritten firms to float the cherries, not the lemons. We also find, however, that the stock price performance of these firms during the first year following the IPO is lower than average. Furthermore, among these firms, the stock price performance of firms whose equity was purchased by an investment fund that is affiliated with the underwriting and lending bank is even lower. We also compute first day returns for the IPO stocks. The first year underperformance is interpreted as IPO overpricing, which is consistent with the 'first day returns. Thus, bank managed funds pay too much for bank underwritten IPOs at the expense of the investors in the funds. We conclude that there is conflict of interest in the combination of bank lending, underwriting, and fund management. Although universal banks use their superior information regarding underwritten firms to float the cherries, investors in bank managed funds end up paying too much for the equity of these firms.

Pages: 41 pages
Date: 1997-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_1997.05.pdf First version, 1997 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boi:wpaper:1997.05

Access Statistics for this paper

More papers in Bank of Israel Working Papers from Bank of Israel Contact information at EDIRC.
Bibliographic data for series maintained by Yossi Yakhin ().