Conflict of Interest in Universal Banking: Bank Lending, Stock Underwriting, and Fund Management

Oved Yosha, Yishay Yafeh and Hedva Ber

No 2359, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Using a newly-constructed data set on Israeli Initial Public Offering (IPO) firms in the 1990s, we study costs and benefits of universal banking. We find that a firm whose equity was underwritten by a bank-affiliated underwriter, when the same bank was also a large creditor of the firm in the IPO year, exhibits significantly better than average post-issue accounting performance, but that its stock performance during the first year following the IPO is considerably lower than average. When an investment fund managed by the same bank is heavily involved in the IPO as buyer of the newly-issued equity, the stock performance during the first year following the IPO is even lower. This, together with negative first day returns, is indicative of IPO overpricing. We interpret these findings as evidence that universal banks use their superior information regarding client firms to float the stock of the cherries, not the lemons (as measured by post-issue accounting performance), but that bank managed funds pay too much for bank underwritten IPOs, at the expense of the investors in the funds. These results suggest that there is conflict of interest in the combination of bank lending, underwriting, {\em and\/} fund management.

Keywords: Bank underwriting and fund management; Conflict of interest; Initial public offerings; Universal banking (search for similar items in EconPapers)
JEL-codes: G21 G23 G24 G28 G32 G35 (search for similar items in EconPapers)
Date: 2000-01
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Citations: View citations in EconPapers (1)

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