Abstract
The entry of commercial banks into underwriting business has been a subject of extensive research among practitioners and academic scholars. Studies have examined the two opposite sides of the debate. On one hand, there is the certification hypothesis and on the other the issues regarding conflict of interest. Despite the interest in the literature, research on commercial bank underwriting of equity IPOs is somewhat limited. This study examines commercial bank underwritten IPOs using recent data (i.e., from 2005 to 2012). We find that commercial banks, in order to attenuate potential conflict of interest and gain additional certification, co-led and co-managed 77 percent of IPOs they participated in with reputable investment banks prior to the financial crisis, and with investment banks in over 93 percent of their issues after the crisis. This strategy seemed to be effective as the banks not only maintained their share of IPO market during the financial crisis, but they also gained market share, at the expense of investment banks, after the credit crisis. In addition, in response to the credit crisis, commercial banks drastically reduced the number of IPOs where they were sole (only) lead underwriters. We find some evidence that commercial bank sole-led syndicates recorded lower gross spread relative to investment bank sole-led syndicates. Finally, commercial bank underwritten IPOs have lower underpricing than investment bank underwritten IPOs suggesting that the information effect outweighed the conflict of interest effect. Overall, the 2008 financial crisis has had a positive effect on commercial banks’ IPO underwriting business.
Published Version
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